Rising interest rates present a double-edged sword for bank stocks. On the one hand, the higher rates attract more capital and allow banks to raise their margins. On the other, higher rates discourage and reduce the number of loans demanded.
The reduced number of loans has become one factor leading to stock price declines in the banking sector across the board. This has also led investors to adjust their positions in bank stocks. One can include Warren Buffett among these investors.
However, he added to positions in both national and regional financial stocks.
As a result, half of his ten largest holdings consist of banks.
Granted, this information release consists of dated information.
The just-released breakdown of the Berkshire portfolio describes its holdings as of September 30th.
Still, while Mr. Buffett has likely made some changes since then, it shows he sees some potential in bank stocks. This also gives average investors the chance to conduct the same type of value investing that has made Mr. Buffett a wealthy man. These five financial stocks could bring that opportunity:
Bank of New York Mellon Corp. (BK)
BNY Mellon (NYSE:BK) came about in 2007 as a result of a merger between the Bank of New York and the Mellon Financial Corporation. Through its Bank of New York segment, it stands as one of the oldest banks in the U.S. It also has become the world’s largest custody bank, holding over $32 trillion under custody.
However, the company does not subsist on its reputation or large asset base alone. Despite many rivals overtaking BNY Mellon in size, it wins awards for both its valuable brand and its safety. The bank also became one of only three banks to pass a crucial stress test following the 2008 financial crisis.
However, this safety does not protect the bank from the ups and downs of the stock market. BK stock currently trades about 18% below its 52-week high. However, Wall Street forecasts 17.5% profit growth this year. They also expect average annual growth for the next five years to come in at just over 8.9%. The recent decline and profit growth have brought the P/E ratio to just 11.6.
Berkshire also increased its BK stock holdings in each of the last two quarters. With its low multiple, reputation for safety, and the apparent endorsement of Mr. Buffett, investors have an opportunity to buy one of the safest and most venerable bank stocks in existence at a discount.
Citizens Financial Group (CFG)
Citizens Financial (NYSE:CFG) provides consumer and commercial banking services in the Northeast and Midwest. The Providence, Rhode Island-based regional bank has seen its stock slide for most of the year. Early this year, the bank found itself plagued by rumors of involvement in the Paul Manafort scandal. After this news, CFG stock began a steady decline. CFG now trades more than 25% below its 52-week high.
Despite this issue, the financials for CFG stock look quite healthy. Analysts forecast profit growth of 36% for the year. While profit will not continue to increase at that rate, analysts still foresee double-digit net income growth through at least 2021. Analysts also forecast 4% loan growth for the company this year. Regional bank stocks on average see loan growth rates around 1%.
Stock declines and growth have combined to give CFG stock a P/E ratio of just under 10.3. In previous years, Citizens had traded at multiples ranging from the mid to high teens. Moreover, CFG pays an annual dividend of $1.08 per share. This gives new buyers a yield of 3% in a dividend that has increased for three straight years.
Given the bank’s involvement in a high-profile scandal, some will take a hesitant approach toward CFG stock. However, I think the unusually low P/E, the high dividend, and double-digit profit growth should adequately mitigate those risks.
The Goldman Sachs Group, Inc. (GS)
Investment banking giant Goldman Sachs (NYSE:GS) has become one of the more interesting bank stocks. Goldman may have become better known for political activities than for its core business. More than one Goldman CEO has gone on to lead the Treasury Department. However, for all of the political influence that may wield, it has done little to boost the GS stock price.
GS stock trades at levels first seen in 2016. It has also fallen more than 26% from its 52-week high. Despite this performance, analysts predict a 13.8% increase in revenue for fiscal 2018. They also forecast profits will rise by 28.6%. While they anticipate flat income growth for 2019, they also expect double-digit profit growth to resume in 2020.
Both this falling stock price and rising profits bring opportunity. As a result of these occurrences, the P/E ratio now stands at about 7.8. This low multiple could explain why Mr. Buffett has added shares of GS stock in the last six months. His position now stands at 18.35 million shares.
Investors should also remember that it remains a leader in M&A advising as well as equity, fixed income underwriting, and recently, consumer banking. Given the projected growth of its businesses and the low valuation, GS stock looks poised for a turnaround.
JPMorgan Chase & Co. (JPM)
One of Mr. Buffett’s more prominent investments from the previous quarter involved a new stake in JPMorgan Chase (NYSE:JPM). Though he has admitted to personally owning some JPM stock in the past, this position had not appeared in previous Berkshire portfolio disclosures. Now, with 35.644 million shares, JPM stock stands as Buffett’s 10th largest holding.
JPMorgan has grown into one of the largest financial institutions in the country. Although it has fallen about 10% from its 52-week high, it still holds a market cap of around $357 billion. The bank maintains four distinct segments involving consumer banking, corporate banking, commercial banking, and asset management.
JPM also has become one of the few bank stocks to trade higher than year-ago levels. Despite seeing a smaller decline than most peers, it trades at P/E ratio of about 11.6. Also, net income has risen by a forecasted 33% this year. Analysts predict 8.6% profit growth next year before profit increases return to the double-digits for 2020 and 2021.
Additionally, investors receive an annual dividend of $3.20 per share. While most bank stocks pay a dividend, few others exceed JPM’s yield of almost 3%. Moreover, that payout has increased for seven consecutive years. Given the profit growth, low multiple, and high dividend yield of JPM stock, I see following Mr. Buffett’s lead on this stock as a wise move.
Texas Capital Bancshares (TCBI)
Texas Capital (NASDAQ:TCBI) serves the banking needs of both middle-market companies and wealthy individuals within Texas. As its name implies, it operates exclusively in Texas, serving customers in the state’s large metro areas. Business and commercial real estate loans make up almost 90% of the company’s business.
TCBI stock has lost more than 40% of its value since May. During the summer, Texas Capital announced a loan loss provision that came in higher than expected. Also, much of the drop occurred following its previous two quarterly reports. In those reports, the company announced it had missed both earnings. In the most recent release, TCBI also missed revenue estimates. These misses occurred because the company failed to capitalize on rising interest rates to the extent it had hoped.
Despite the bad news, analysts still expect earnings to grow by 47.5% this year and 11% in 2019. After this massive earnings increase for 2018, the P/E ratio comes in at 9.9. This looks like a bargain for a stock that has supported an average P/E of 20.4 over the last five years.
Top executives announced new positions in TCBI stock following the previous earnings report. I would bet that the low P/E and high growth rate motivated these managers. Due to both the financial metrics and the insider buying, this looks like a chance to buy TCBI stock at a considerable discount.
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Source: Investor Place