It is often very hard to evaluate stocks bouncing higher at a rapid pace. The following are the list of S&P500 Finance stocks consistently rising since the start of the year. These securities consistently outperformed the broad market. We basically used two fundamental criteria to evaluate these stocks to see if there is much value left to open long positions.
Company earnings are very closely followed by many investors. Discounted earnings model is a popular model to estimate the worth of a company. The amount of future earnings from the business is estimated for each forecast period and discounted at the appropriate discount rate to determine their present value. The present value of each period of estimated earnings for all future years are then added to determine the total present value.
The last step determines the perpetual value. It's the residual value of the business at the end of the period of years being estimated. This value is discounted to its equivalent present value and added to the present value of the future earnings to determine total intrinsic value. Some investors like adding the book value to this number; we intentionally eliminated the book value as we are evaluating the companies based on earnings power. This model is commonly used to price IPOs and to evaluate company's worth in a M&A scenario.
A rule of thumb for stock valuation that is popular on Wall Street is to calculate the sum of the expected growth rate of a stock's earnings plus its dividend yield and divide this by its P-E ratio. The higher the ratio, the better, and the famed money manager Peter Lynch recommends investors select stocks with a ratio of 2 or higher and to avoid stocks with a ratio less than 1.
Bank of America Corp (BAC): Bank of America Corporation, a financial holding company, provides banking and nonbanking financial services and products to individuals, small and middle market businesses, large corporations, and governments in the United States and internationally. The stock has a Return on Assets (ROA) of -0.2% and a Return on Equity (ROE) of -1.8%. The company is trading with a Return on Invested Capital (ROIC) of -.5%. The company is expected to earn $1.07 per share next year. The company is expected to grow at 10.29% over the next 5 years. The company is valued at $12.0 using the Discount Earnings Model (DEM). The company has a sum of growth and yield to PE ratio (GY2PE) of 0.96. BAC is currently trading at $9.80, raising $4 or 69% this year. BAC has 20% upside potential and is trading at fair levels based on GY2PE.
SunTrust Banks Inc (STI): SunTrust Banks, Inc. is a commercial banking organization. The company is a diversified financial services holding company whose businesses provide a range of financial services to consumer and corporate clients in the United States. The company has a ROA of -0.1% and a ROE of -.5%. The company is trading with a ROIC of -.2%. The stock is expected to earn $2.65 per share next year. The stock is expected to grow at 6.92% over the next 5 years. STI is valued at $27.7 using DEM. The company has a GY2PE of .68. STI is currently trading at $24.38, raising $5.9 or 32% this year. STI is trading near its fair value (the book value has been ignored as the stocks are evaluated using earnings power).
Regions Financial Corp (RF): Regions Financial Corporation provides retail and commercial banking, trust, securities brokerage, mortgage and insurance products and services in the United States. RF has a ROA of -0.6% and a ROE of -5.5%. The company is trading with a ROIC of -2.5%. The company is expected to earn $0.72 per share next year. The stock is expected to grow at 3.19% over the next 5 years. RF is valued at $6.9 using DEM. The company has a GY2PE of .35. RF is currently trading at $6.41, raising $2.1 or 47% this year. RF trading near its fair value.
Capital One Financial (COF): Capital One Financial Corporation is a diversified financial services holding company. The Company and its subsidiaries offer a range of financial products and services to consumers, small businesses and commercial clients through branches, the Internet and other distribution channels. COF has a ROA of 1.5% and a ROE of 10.3%. COF is trading with a ROIC of 4.8%. The company is expected to earn $6.84 per share next year. The stock is expected to grow at 7.45% over the next 5 years. The company is valued at $73.8 using DEM. The company has a GY2PE of .91. COF is currently trading at $54.50, raising $11 or 25% this year. COF is trading at 34% discount levels.
Hartford Financial Services Group (HIG): The Hartford Financial Services Group, Inc. together with its subsidiaries provides insurance and financial services in the United States and internationally. The company maintains a retail mutual fund operation, whereby the company, through wholly-owned subsidiaries, provides investment management and administrative services. The company has a ROA of 0.4% and a ROE of 6.7%. The company is trading with a ROIC of 4.8%. The company is expected to earn $3.69 per share next year. The company is expected to grow at 7.04% over the next 5 years. HIG is valued at $39.6 using DEM. The company has a GY2PE of 1.43. HIG is currently trading at $21.83, raising $5 or 30% this year. HIG is trading at 81% discount levels.