Recently, Financials have been very shaky and extremely risky. However, if we learned anything from March 2009, it is that strong financial stocks can make a very big recovery. Two examples are: General Growth Properties (GGP), which went from $0.46 to $13 (2,726% upside) or iStar Financial Inc. (SFI), which went from $0.75 to $6 (700%).
I feel that in order to see substantial gains in the market, one must do substantial research in order to find stocks that are being sold at a true "value." A momentarily bad quarter and shifting market sentiment has pushed the market low, on some stocks more than on others. Starting this year, it seems financials have begun to recover very nicely, and I expect this to continue throughout the year. Below, I have screened four stocks that I believe to be undervalued given their < 1 PEG. Not only are they undervalued, but these stocks are experiencing huge EPS growth. I believe these stocks will see huge gains throughout the year and years to come.
Discover Financial Services (DFS) is a bank holding company. DFS is a direct banking and payment services company. The Company is also a financial holding company. The current market price is $29.93, with a market price of $31.48.This represents a 5.18% upside potential, but could be an understatement, given its PEG of 0.84 and one-year EPS growth of 233.17%, with potential to continue its growth.
Discovery Financials' net margin (trailing 4 quarters) of 23.8% is substantially above the Consumer Financial Services Industry average of 12.5%. DFS's trailing P/E, forward P/E, and forward PEG multiples are all significantly below their 5-year averages. Based on forward PEG, DFS currently trades at a 40% discount to its Consumer Financial Services Industry peers, and a trailing P/E of 7.5 represents a 54% discount. DFS has quarterly revenue growth of 23.10% compared to its direct competition; American Express Company (AXP) at 4.70%, Mastercard Incorporated (MA) at 20.20% and Visa, Inc. (V) with 13.80% quarterly revenue growth. This further shows how undervalued this company is compared to its industry peers.
On July 1, 2008, DFS announced completion of its acquisition of Diners Club International for $168 million. The purchase expanded DFS's presence internationally providing a path to achieve global acceptance, establish new international partnerships and generate higher payment volumes. Since the acquisition DFS has also taken major steps in reducing credit risk and credit quality. This has allowed management to focus on growth initiatives and in 2011 saw the benefits of unusually strong credit improvements. Analysts anticipate strong economies of scale with significant investment spending for the company especially with their strong customer loyalty base.
MACD indicates a Bullish Trend along with its 10, 21, 50, and 200 day moving averages of $29.93, $29.36, $27.26, and $25.02 respectfully. Overall, I am very bullish on this stock, and think it is a great addition to a long-term portfolio.
Ocwen Financial Corporation (OCN) through its subsidiaries, is a provider of residential and commercial mortgage loan servicing, special servicing and asset management services. The current market price is $15.92, with a one-year analyst price target of $18.13. This represents a 13.88% upside potential, but I believe this is an extremely low expectation, especially given its PEG of 0.24 and one-year EPS growth rate of 116.76%, with no sign of a slowdown. For fiscal year 2012, analysts estimate that OCN will earn $1.71. For fiscal year 2013, analysts estimate that OCN's earnings per share will grow by 22% to $2.08.
Revenues for the year ended December 31, 2011 were $495.9 million vs. $360.4 million a year prior year; this represents 38% year over year revenue growth. Total operating expenses were $239.6 million, as opposed to $236.5 million in 2010, increasing 1%. These numbers are very intriguing, because revenue is growing 38 times faster than expenses, hence the EPS growth and PEG. Compared to its industry peers, OCN performs exceptionally well. Quarterly revenue growth is 38.3%, compared to the industry average of 10.3%, and operating margin is 56.68% compared to 25.89%.
MACD indicates a Bullish Trend along with its 10, 21, 50, and 200 day moving averages of $15.89, $15.59, $14.87, and $13.40 respectfully. Overall, I am very bullish on this stock, and think it is a great addition to a long-term portfolio.
Protective Life Corporation (PL) is a holding company whose subsidiaries provide financial services through the production, distribution and administration of insurance and investment products. The current market price is $27.20, with a one-year analyst price target of $28.22. This represents an 3.75% upside potential, not including its 2.3% dividend yield. This stock appears to be undervalued at its current level, and carries a PEG of 0.7.
PL is currently valued at a discount to the S&P 500 index based on trailing P/E, forward P/E and forward PEG. Based on forward PEG, PL currently trades at a 42% discount to its Life & Health Insurance Industry peers and based on trailing P/E, PL currently trades at a 23% discount. This signals a great buy opportunity for a stock that appears to be on the rebound. PL has an operating margin of 18.61%, this compares very well with its direct competition; American International Group, Inc (AIG) has 9.04%, MetLife, Inc (MET) has 17.01%, and Prudential Financial, Inc (PRU) has an operating margin of 10.88%. PL also has an EPS of 3.92 compared to the industry average of 0.93. For fiscal year 2012, analysts estimate that PL's earnings per share will decline by 4% to $3.32.
The 21, 50, and 200 day moving averages of $27.53, $25.47, and $21.46 respectfully indicate bullish momentum. I believe this stock is making its turnaround; this undervalued stock is a great buy for a long-term portfolio.
Morgan Stanley (MS) is a global financial services firm that, through its subsidiaries and affiliates, provides its products and services to a group of clients and customers, including corporations, governments, financial institutions and individuals. The current market price is $17.32, with a one-year analyst price target of $22.48. This represents a 29.79% upside potential, but I believe this is very modest, and it could see high $20s, given its PEG of 0.9 and one-year EPS growth rate of 392.92%, which is still growing. For the fiscal year 2012, analysts estimate that MS earnings per share will grow by 20% to $2.05.
For 2012, analysts expect nearly a 10% gain in net revenues driven by increasing business and investor confidence. Net revenues increased at a compound annual growth rate (CAGR) of about 10% in the five years ending in 2007, but declined 18% in 2008 and a further 3% in 2009. In 2010, net revenues increased by 35% as the broad economy improved, client activity picked up, and capital markets activity also increased. In the second quarter of 2011, Mitsubishi UJF Financial Group (MUFG) converted its $7.8 billion preferred equity stake in MS to common shares, which has improved MS' common ratio by 290 basis points and its overall capital position by eliminating the $784 million of annual preferred dividends paid to MUFG. Although this transaction has increased the number of common shares outstanding, the move will better enable MS to achieve its goal of acquiring the remainder of its Smith Barney joint venture over the next few years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.