If you have been holding financial stocks in your portfolio, you may be getting used to seeing red during the trading day. If you’ve ever heard the saying, “buy into weakness, sell into strength,” this may be a prime example. The ever increasing scrutiny of large financial institutions by the American people, as well as fear over the real estate crisis, has turned financial stocks into the scapegoats of the market. The following five companies are making a real effort to clean up their books and reclaim the share prices that should accompany their prestigious and well known brand names.
Bank of America, (BAC) – BAC has been treading water lately, off its 52 week low of $5.13 set on 10/4/2011 but not by much. As the continued negative press of the foreclosure crisis and Occupy Wall Street continue to dominate the news, no other institution seems to be feeling the heat quite like Bank of America. The 52 week high of $15.31 set on 1/15/2011 seems like a distant memory at this point, and if you have been holding on all year or starting to think about getting on board, there are several items to consider. As non-performing loans continue to decline on a quarterly basis and sinking loan loss provisions are helping to grow earnings, Bank of America’s balance sheet is slowly making a transformation. The cash infusion of $5 billion provided by Berkshire Hathaway this summer should be a good sign to investors that Bank of America will have the necessary means to fulfill its obligations. With all of the uncertainty surrounding financials, I expect Bank of America to trade in a range for quite some time. Although, if you have an outlook of 3-5 years, I believe that Bank of America could return to the teens, and in the meantime, could prove a nice covered call play for your portfolio.
Citigroup Inc., (C) – Since its 1 for 10 reverse stock split back on May 9, 2011, Citigroup has followed the pattern of so many other companies that execute reverse splits. Experiencing a steady decline from its split adjusted close of $45.20 on May 6, 2011, Citigroup is currently trading at $30.34. Although news of the foreclosure crisis and the American people’s increasing discontent with large banks certainly caused some of the price decline, I can’t help but wonder where it would be sitting if the board had not went ahead with the reverse split. One bright spot at Citigroup is the continued earnings growth fueled by lowering the amount of reserves the bank will hold on hand. A move that two of Citigroup’s biggest competitors, Bank of America and Wells Fargo (WFC), have been publicly criticized for failing to do. As long as revenues continue to rise through continued expansion of lending practices, Citigroup shouldn’t have any problem maintaining its current position. I firmly believe that this bank has been wounded by the current cloud of uncertainty surrounding the banks, and it could be several years until it moves above $50. As Citigroup is the first large institution to stick its neck out and start lending heavily, so how quickly they recover from this mess will be almost entirely fueled by its future results.
Wells Fargo & Company, (WFC) – Many large financial stocks continue to offer dividend yields that are comparable to the yield on an FDIC insured savings account. At 1.9%, Wells Fargo is currently offering shareholders a mere ten basis points below the average yield on a five year certificate of deposit with some impressive upside potential as well. Along with the dividend that was increased in March, Wells Fargo announced plans to repurchase 200 million common shares. Net income was up substantially at the end of the third quarter over the previous year. As with competitor Bank of America, results were improved due to a decrease in loan loss provisions. With a profit margin of 20.83%, accompanied by an impressive operating margin of 35.65%, Wells Fargo is storming ahead of competitors, Bank of America and Citigroup. As with all of the large financial institutions, future results may be impacted by the introduction of increased regulation or the possibility of higher FDIC fees. Should the market take a bearish turn in the near future watch for company insiders scooping up shares at or below the 52 week low as Cynthia H. Milligan did on 8/9/2011. Wells Fargo is off its 52 week low of $22.58 set on 8/10/2011, and with the strong potential for future positive earnings results, it could be headed to the thirties soon.
Metlife Inc., (MET) Bouncing back nicely after hitting a 52 week low of $25.61 on the infamous 10/4/2011, Metlife currently trades at $34.77 while still managing to provide investors with a 2.1% dividend yield. Although the current interest rate environment is tough on insurance companies, Metlife is still standing tall with a 13.21% operating margin from a gross margin of 38.13%. Impressive margins as well an astounding 64.4% quarterly (yoy) revenue growth rate leaves competitors Prudential (PRU) and Allianz (AZSEY.PK) in the dust. The annuity arm of Metlife may receive a real boost, as continued market volatility causes retirees to move nest eggs into investments that offer a dependable fixed rate of return. On 10/27/2011, Metlife reported earnings of $1.11 per share, which was in line with estimates while competitors, Prudential and Hartford Financial Services Group (HIG) missed estimates and traded down in the after hours session. If Metlife can continue to capitalize on its strengths, I believe that it could have solid upward momentum well into next year.
Mastercard Incorporated, (MA) – Fresh off a new 52 week high of $368.99 set on 11/4/2011, Mastercard is a prime example of the tremendous growth that the electronic payment processing business model still has to offer. An over 27% increase in net revenue that was driven by strong usage in overseas markets helped push Mastercard’s share price to new heights. Even during a global slowdown, consumers still need to purchase essentials, and with paper currency usage on the decline, Mastercard is reaping the rewards. Plus, Mastercard’s impressive quarterly (yoy) revenue growth rate of 27.3% is more then double it’s two closest competitor’s, Visa (V) and American Express (AXP). As consumers continue to utilize electronic payment processing as a form of convenience and to take advantage of various rewards and incentive programs, I believe Mastercard has many quarters of continued growth to come. The biggest question on my mind is whether a stock split could be looming over the horizon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.