5 Financial Stocks: Which Is a 'Buy' Right Now?

Includes: C, JPM, MS, RF, WFC
by: Investment Underground

We recently talked about Bank of America (NYSE:BAC) in this article, and now we’d like to take a look at some other popular financial stocks. These stocks may offer a bit more stability than BAC, although that isn’t saying much in an industry full of volatility. Note that all of the following were NYSE volume leaders for August 17.

Citigroup (NYSE:C) stock has lost about 20% in the past 12 months, which puts it at about the middle of the pack for performance compared to other financials. As discussed here, though, the stock has really taken a hit in the most recent months. Clearly, investors weren’t fooled when the company did a reverse stock split in May. Observers have also questioned Citigroup’s use of $1.31 million to lobby the government, but it’s quite clear that this is merely a drop in the ocean for the big bank. In fact, with the stock dropping so much, C is actually decently priced.

Consider its price to earnings ratio of 9.22 and price to sales ratio of 1.39. On the other hand, cash flows haven’t been quite as good, with the company down $206 million since the beginning of 2011. As far as hedge managers go, C has received mixed reviews. John Paulson and George Soros have reduced their holdings of Citigroup, while Bill Ackman and Lee Ainslee bought the stock. (Consider reading this for more information about which financials hedge fund managers like right now.) At least one analyst also has mixed feelings, noting that while bank fundaments are poor right now, the industry could see a short-term rally regardless. In fact, Citigroup is one of the banks he likes the most.

Wells Fargo (NYSE:WFC): This little big bank is only down slightly over the past year, as WFC offers less exposure to Wall Street than many of the other financials. In fact, one piece of news related to its Main Street business is the announcement that the bank will test a monthly fee for debit card users in some states. This comes as a result of new regulations from Congress that will limit how much banks can charge vendors when customers use debit cards. Although normally we would be inclined to boo Wells Fargo’s move, the truth is that moves like this one will probably seen across the banking industry. In other words, if everyone in the banking industry makes this move, then Wells Fargo will be able to do this without losing customers. Also note that Congress’s change will probably cause banks to stop offering rewards programs since the money used to fund these come from the merchant debit card fees.

WFC offers some strong value metrics. Price/earnings to growth ratio of 0.63 and price to sales ratio of 1.79 are low, while price to earnings ratio of 9.64 is actually a bit high compared to some of the other beaten down stocks in this industry.

Like WFC, JP Morgan Chase (NYSE:JPM) hasn’t fared too poorly in the past 12 months. This can probably be attributed to CEO Jamie Dimon’s solid leadership, as the company has navigated recent turbulence quite nicely. In fact, as seen by the recent announcement that JP Morgan will provide services to the Federal Home Loan Bank of Chicago, this company should probably be seen as the leader in the financial industry. At least one other article on Seeking Alpha agrees and also notes some important reasons why this stock is currently attractive. Important points raised are recent dividend increases/stock buybacks as well as a low price to tangible book value ratio.

Additionally, investors should probably be surprised that the stock’s price to earnings ratio is only 7.81, lower than competitors like Barclays (NYSE:BCS) and Citigroup. Operating margin is also a very solid 39.91%. Furthermore, JPM had a net cash inflow of $6.997 billion for the quarter ending June 30, quite impressive considering the economic climate. Regardless, not everyone likes JPM stock, as discussed here and here. These are most likely concerns with the financial industry overall though, and do not necessarily represents problems with JPM specifically. Note that JP Morgan Chase has also received attention for the strong-performing bonds it offers.

Morgan Stanley (NYSE:MS): This primarily investment bank has performed rather poorly the past 12 months, and the pain may not be over yet. A lawsuit alleges that the company’s Saxon division took millions of dollars from the Home Affordable Modification Program. Money from this federal initiative was supposed to allow mortgage companies like Saxon to help out homeowners under financial duress, but it seems that Saxon merely kept the money. More information on the lawsuit can be found here, but this could be truly poisonous for MS stock. Additionally, Morgan Stanley’s price to earnings to ratio is horrendous right now, 64.19 due to an EPS of only 0.27 in the past 12 months. Note that Goldman Sachs' (NYSE:GS) price to earnings ratio is only 11.50. Price/earnings to growth and price to sales for MS are reasonable though at 1.20 and 1.04 respectively.

Also, banking expert Richard Bove likes MS, as explained here. His reasons for this are primarily related to Morgan Stanley’s management team, particularly CEO James Gorman. In fact, Bove is quite a fan of Gorman, noting the CEO’s strength with both concepts and execution. MS has also seen some insider buying, which could make for a short-term rally, as discussed here. On the other hand, that same article points out some reasons why MS stock may not be great. Specifically, new regulations will probably prevent Morgan Stanley from making as much money as it used to.

Regions Financial (NYSE:RF): The amount of volume this smaller bank has seen lately may be a surprise to many. Quite a bit of that volume has led to downward movement though, and the stock price is nearly half of the high it experienced earlier in the year. Amongst other things, Region Financial may be hurting due to a lack of capital. Despite this, the company recently made a deal with Bank of America to buy part of its credit card portfolio. This certainly does not seem like a wise move for Regions, but without full details of the transaction, it’s hard to truly judge its merits.

Other problems for Regions include a paltry operating margin of 0.17% and a trailing-12-month net income of -$101 million. The three past quarters have seen positive income for RF though, so this is merely due to a terrible quarter ending September 30, 2010. Price to sales is also pretty strong at 1.19. In fact, this is somewhat lower than that for competitors like SunTrust (NYSE:STI) and BB&T (NYSE:BBT). At 4.64 though, price/earnings to growth is severely inflated for RF. Finally, while some investors believe that RF could be a takeover target due to its strength in the South, we think it is unlikely that this would occur in the current financial environment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.