Relative Value Regressions: Financials

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 |  Includes: COF, GS, WFC
by: Simple Qualitative

So far this year the financial sector has performed very well for investors. Most of the large financial institutions have beat estimates while returning money back to shareholders through dividends and share buybacks. Over the weekend, I decided I would look for a few names in the financial sector which could be attractive using the Price to Earnings, Price to Book, and a Price to Sales models. Below, I will share the results of a few simple regressions that I used to determine if Goldman Sachs Group Inc. (NYSE:GS), Wells Fargo & Company (NYSE:WFC) and Capital One Financial Corp. (NYSE:COF) are all undervalued relative to 20 similar financial institutions. All the data and ratios used for the regressions were sourced from a major data provider during the trading session on Friday. I provided the data I used as well as the predicted ratios and prices. Consider this a starting point for continued quantitative, qualitative and technical research.

Goldman Sachs Group Inc.

Price to Earnings Regression
Goldman Sachs Group Inc. GS
R-Square 0.40
Current Price $155.25
Current P/E 10.31
Growth Rate 10.57
Beta 1.23
Dividend Payout Ratio 12.04
Predicted P/E 12.43
Predicted Price $181.92
Click to enlarge
Price to Sales Regression
Goldman Sachs Group Inc. GS
R-Square 0.70
Current Price $155.25
Current P/S 1.85
Growth Rate 10.57
Beta 1.23
Dividend Payout Ratio 12.04
Profit Margin 10.66
Predicted P/S 2.21
Predicted Price $186.17
Click to enlarge
Price to Book Regression
Goldman Sachs Group Inc. GS
R-Square 0.40
Current Price $155.25
Current P/B 1.07
Growth Rate 10.57
Beta 1.23
Dividend Payout Ratio 12.04
Return on Equity 10.66
Predicted P/B 1.34
Predicted Price $193.95
Click to enlarge

Wells Fargo & Company

Price to Earnings Regression
Wells Fargo & Company WFC
R-Square 0.40
Current Price $37.97
Current P/E 11.20
Growth Rate 11.08
Beta 1.16
Dividend Payout Ratio 25.88
Predicted P/E 12.81
Predicted Price $43.58
Click to enlarge
Price to Sales Regression
Wells Fargo & Company WFC
R-Square 0.70
Current Price $37.97
Current P/S 2.20
Growth Rate 11.08
Beta 1.16
Dividend Payout Ratio 25.88
Profit Margin 13.16
Predicted P/S 2.36
Predicted Price $40.69
Click to enlarge
Price to Book Regression
Wells Fargo & Company WFC
R-Square 0.40
Current Price $37.97
Current P/B 1.38
Growth Rate 11.08
Beta 1.16
Dividend Payout Ratio 25.88
Return on Equity 13.16
Predicted P/B 1.50
Predicted Price $41.09
Click to enlarge

Capital One Financial Corp.

Price to Earnings Regression
Capital One Financial Corp. COF
R-Square 0.40
Current Price 55.16
Current P/E 9.83
Growth Rate 8.00
Beta 1.25
Dividend Payout Ratio 3.00
Predicted P/E 11.37
Predicted Price $70.61
Click to enlarge
Price to Sales Regression
Capital One Financial Corp. COF
R-Square 0.70
Current Price $55.16
Current P/S 1.34
Growth Rate 8.00
Beta 1.25
Dividend Payout Ratio 3.00
Profit Margin 9.94
Predicted P/S 2.00
Predicted Price $82.40
Click to enlarge
Price to Book Regression
Capital One Financial Corp. COF
R-Square 0.40
Current Price $55.16
Current P/B 0.79
Growth Rate 8.00
Beta 1.25
Dividend Payout Ratio 3.00
Return of Equity 9.94
Predicted P/B 1.23
Predicted Price $86.15
Click to enlarge

Conclusion

I highlighted these three companies because all three of the models showed significant room to the upside. I believe the financial sector as a whole will continue to outperform the broader market but I would look to these three companies to outperform the entire financial sector. Out of the group, Capital One Financial seems to be the most undervalued relative to the other 20 companies used in the regressions. Please use this information in combination with further qualitative analysis.

Disclosure: I am long WFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.