Financial Stocks: Domestic Winners
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, the U.S. financial sector has benefited greatly from a round of analyst upgrades, many of whom were previously bearish for several years. In the wake of all this optimism companies have seen generous price increases. Are these recent moves justified, and is now really the time to buy?
Here we will take a look at financials that seem to be poised for long term value investing greatness. After doing my examination of domestic financials, there were two clear winners and one special award I'll call the "Phoenix."
I am about to do something I have never done before: I must declare two winners in this category. They are Wells Fargo (NYSE: WFC) and JPMorgan Chase (NYSE: JPM). On top of declaring them winners for different reasons I'm also going to be so bold as to assert that they are suitable for two different styles of long term investors.
WFC made the winners circle for the long term safety and consistent returns it has provided for 160 years. Though the yield isn't the largest, at only 2.56%, it comes at the expense of a 25% payout ratio, leaving plenty of room for dividend increases. However, with the 24% increase the stock has seen over the last 52 weeks, it's no surprise that the dividend seems a bit low compared to the current price. Look for dividend increases in the coming quarters.
Currently trading at $34.35 (Figure 1), WFC represents a compelling value with a P/E of only 10.78 compared to an industry average of 15.70. Combine that with a PEG of 1.20, and we have solid value and good expected returns.
WFC is suitable for those who simply cannot take risks. During the financial crash of 2008 WFC plunged with the rest of the financial world, but that was quickly corrected when savvy investors realized that WFC had a bulletproof portfolio. The conservative management that guided this company through numerous stock market crashes, recessions, and one great depression is going to keep your money safe and sound all while earning solid returns. Conclusion: Strong Buy and Long Term Hold.
JPMorgan Chase is also my winner for the inspired management, aggressive business plan, and consistent out-performance. Once in a while you get a rock star icon in a certain industry. For insurance it's been Warren Buffett. For technology we had Steve Jobs. For the retail banking sector we have Jamie Dimon.
JPM is currently trading at $45.15, which is near its 52 week high and approaching its 5 year high. The P/E of 9.60 and PEG of 1.28 suggests that there is value here and still plenty of upside to this stock. Highlights of their balance sheet include a $50.15 book value, a 2.60% yield that comes at the expense of only a 23% payout ratio, and a 5 year net profit margin average of 12.00% vs an industry average of 6.40%.
Many analysts are expecting JPM to power through the long term resistance of $46-$48, setting the tone for a long term bull cycle for this stock. What was once long term resistance is expected to become long term support. Looking at a 5 year chart (Figure 2), we can see that JPM is setting up for a classic break out move.
While Jamie Dimon's smart management kept JPM largely out of the 2008 financial crisis, this bank should not be labeled as conservative. The "London Whale" losses experienced in 2012 show that this bank is still engaging in somewhat risky business practices. Therefore, this stock wouldn't be quite as suitable as WFC for those that are resigned to low risk. However, it is worth owning for those that can tolerate slightly larger percentage swings while waiting for Dimon to return copious amounts of profit to shareholders. Conclusion: Long Term Buy and Hold.
American International Group (NYSE: AIG) was one of the hardest hit during the financial crash of 2008. It was the recipient of large amounts of TARP (Troubled Asset Relief Program) money from the federal government: $182.3 billion to be exact. Many analysts predicted the demise of this once powerful insurance and financial giant, even with that enormous amount of aid.
Fast forward to the end of 2012, and AIG is alive and well. Under the leadership of Bob Benmosche (CEO as of August 2009), AIG has repaid all of the TARP money back to the US government. Now he will most likely seek to repurchase shares and initiate a dividend to benefit their long suffering shareholders.
AIG divested themselves of peripheral assets to pay debts and re-focused on their core business. The new and improved AIG has an already established global footprint, a top-notch CEO, much safer business model, and is free from heavy government regulation and repayment burdens. After 4 years investors have finally seen the light at the end of the tunnel.
AIG is currently trading at $35.30 (Figure 3), which is approaching its 52 week high of $37.67 seen back in October. Given the spectacular year over year numbers that AIG has been producing you can expect this up-trend to continue.
With a 5 year PEG ratio of 0.43, a current book value of $68.87, and solid books brought to you courtesy of Bob Benmosche, AIG represents a compelling value coupled with the potential for a phenomenal return to greatness. This is the proverbial Phoenix rising from the ashes. Conclusion: Strong Buy and Long Term Hold.
Lulupoopsalot has a position in AIG. The Motley Fool recommends American International Group, Inc. and Wells Fargo & Company. The Motley Fool owns shares of American International Group, Inc., JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: Long Jan 2014 $25 Calls on American International Group, Inc.. 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!