4 Financial Stocks to Consider As Housing Bounces Back

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s official: Housing is back.

After a six-year slump, real estate has finally started to bounce back across the country. Low mortgage rates and pent-up demand have coaxed buyers back into the market, and homeowners who list their houses are seeing more traffic.

For those who still doubt that the long national real estate nightmare is over, I submit the following evidence: During the past year, home prices increased in 92 of the country's hundred largest metropolitan areas, with prices rising as high as 23% in Phoenix and 17% in San Francisco.

In addition, sales volume rose in 69 of the top 100 markets, and 35 of those showed double-digit gains. Investors can benefit by considering companies that are poised to capitalize on this rebound.

Wells Fargo (NYSE: WFC) led things off last week with moderate results reporting first-quarter earnings that arrived at $0.92 per share, which beat Street estimates by $0.04. However, revenue was light - arriving at $21.3 billion versus estimates of $21.59 billion.

Given that profits soared 23%, it's hard to be disappointed. What's more, this is yet another example of how Wells Fargo continues to demonstrate solid execution and leverage. This is despite prolonged weakness in interest rates. Not only is Wells Fargo one of the safest banks in the market, it is arguably the cheapest. It’s lending strategy is conservative, which is expected from a company over a century old.

Here’s a name that might cause a stir: Bank of America (NYSE: BAC).

Before readers find the next article, I’d like to point out that Bank of America is still a dominant name within a sector that is continually improving. Obviously, it is far from flawless, but the bank also deserves credit for making moves to reduce its risks and return value to shareholders.

Bank of America recently reported first-quarter earnings that missed expectations, but exceeded those reported during the same period in 2012. Bank of America reported earnings of $0.20 per share, compared to expectations of $0.23 per share. Then again, this is 6% better than three months ago, when analysts were (then) expecting earnings-per-share to arrive at $0.21, which means the Street has gotten a bit more bullish. 

The nation’s second-largest lender by assets had revenue of $23.5 billion in the first quarter, a 13% decline from the $26.9 billion posted during the same quarter in 2012. While it's true that Bank of America has posted consecutive quarters of revenue declines, the bank has nonetheless instituted measures to ensure its long-term success. The bank has every right to feel confident moving forward.

Investors should also feel encouraged that the board of directors recently approved a stock buyback program valued up to $5 billion in its common stock and $5.5 billion in its preferred stock. As it stands, these shares are still discounted to the bank's tangible book value.

PNC Financial Services (NYSE: PNC) is another company that could benefit from the mortgage pickup. Shares of PNC Financial are up 14% this year and are just 3% away from a new 52-week high. To be fair, the stock hasn’t seen a lot of movement recently, perhaps because of the company's perceived inability to produce long-term return on equity.

While PNC has done a great job cleaning up its credit profile, the increase in the level of bad debt on its books is a concern. In this environment, it would go a long way if management were able to work the debt down to a meaningful level. In addition, expenses have risen a bit too much. High debt risk with increased expenses does not make a great combination. There are also many positives here, as well. In the most recent quarter, the bank posted strong net interest income, with an 11% sequential surge in fees.

PNC built on this performance with its first quarter earnings announcement. The company's first quarter earnings came in at $1.76 per share, compared to $1.44 during the same quarter of 2012. The Street expected earnings of $1.57 per share. Total revenue was up 6% to $4 billion. Analysts were expecting revenue to drop more than 2% to $3.98 billion.

Below, I will compare these companies with others in the financial sector that may or may not include mortgage services.

I would look to add to JPMorgan Chase (NYSE: JPM), which just reported first-quarter earnings and is trading at a P/E ratio that is 4 points lower than PNC. Although investors weren't too pleased with JPMorgan's report, relative to expectations, it was actually pretty good.

JPMorgan posted earnings of $1.59 per share and a 33% increase in net income, which arrived at $6.5 billion. Despite the 3% decline in revenue, which arrived at $25.8 billion, JPMorgan managed to lower its provision for credit losses by $107 million, or 15%.

The bank was able to gain $126 million from a wider spread of its own credit, which was advantageous to the extent of $0.18 per share in earnings. What's more, even when this benefit was adjusted out, the bank still would have beaten consensus estimates by 3 cents. This is a well managed brand that should outperform the rest of the year.

Finally, one cannot end the discussion without mentioning the pros and cons of mortgage-backed securities. MBSs are a way for small regional banks or home loan service companies to give mortgages to their customers without having to worry if they have the assets to cover the loan. Instead, the company acts as an intermediary between the homebuyer and the investment markets. While these securities are primarily used to provide safe income, there is also the opportunity to get some capital appreciation as interest rates fall.

Financial stocks have done quite well year-to-date as shares of some of those named here are at or near their 52-week highs. Investors should get into and enjoy the return of the mortgage market.


Bill Edson has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., PNC Financial Services, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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