Financial Stocks Go On Sale
Even though the stock market is near an all-time high, not every stock is performing well.
In particular, financial stocks like banks and investment managers have taken a hit since the industry reached a new high in September.
The iShares US Financials ETF (ticker: IYF) is down almost 10% over the past few weeks.
It seems strange for financial stocks to struggle when interest rates have been rising all year.
However, some large financial companies are performing poorly and dragging the industry down.
And because of their recent drops, these financial stocks are trading at some great prices right now.
First up is Bank of America (ticker: BAC), one of the largest banks in the US.
Over the last 12 months, Bank of America has made over $32 billion in profit.
Despite all of its income, Bank of America’s stock price is down over 20% from an all-time high reached in August.
What’s going on?
There are a few factors at play.
First, Bank of America missed on earnings last week, which sent the stock price down almost 5% in a single day.
The miss was largely due to lower trading fees in its fixed income business.
Higher rates are usually good for banks, but rate uncertainty (which is what we’ve been experiencing) makes investors nervous and less likely to trade bonds.
Second, Bank of America’s stock price was overvalued.
Its price-to-book ratio (P/B) was over 1.5x a few months ago when banks usually have a ratio around 1.1x.
Now, Bank of America’s P/B ratio sits around 1.3x, which is right around its historical average.
People are willing to pay a bit more to own a larger and safer bank, which explains why Bank of America has a higher P/B ratio than its peers.
Bank of America is now trading at a really interesting price.
Its forward price-to-earnings (P/E) ratio, which uses next year’s earnings, is only 9.9x and below its historical average.
Goldman Sachs (ticker: GS) is another behemoth in the financial world, but like Bank of America, it has struggled recently.
Goldman Sachs is one of the largest investment banks in the world with more than $22 billion in profit over the past 12 months.
However, its stock price is down over 20% from its high reached in July.
Higher rates actually hurt investment banks like Goldman Sachs since companies are hesitant to finance new deals with such high borrowing costs.
So, Goldman Sachs’ recent struggle makes perfect sense.
However, the investment bank reported an almost 40% increase in its EPS for the 3rd quarter last week, which surpassed estimates.
The stock price barely moved, so now is a great time to get some shares at a discount.
Goldman Sachs’ forward P/E ratio is only 12.3x, which is below its industry average.
Plus, its profit margin of 34% is more than double the margin of other investment banks and is near an all-time high for Goldman Sachs.
Finally, let’s talk about Charles Schwab (ticker: SCHW), the large investment broker managing over $13 trillion in client assets.
Schwab’s stock price is down about 17% from its high reached in late August.
But the drop doesn’t really match what Schwab is reporting for earnings.
Last week, Schwab reported a 28% increase in its EPS, largely driven by higher interest spreads and fee income.
Concerns over changing interest rates make investors cautious about investing with brokerages like Schwab.
But now is the time to take advantage of a stock drop going too far.
Schwab’s P/E ratio sits at 17x, which hasn’t been lower in the past 3 years.
Plus, its profitability is off the charts.
Schwab’s profit margin of 35% is one of the highest among financial firms and is currently at an all-time high for the company.
Following the recent pullback, which financial stocks are you looking at right now?
Coach Parker
Category: Stocks
