3 Financial Stocks To Consider For Your Portfolio

Includes: GS, JPM, KEY, SBRCY
by: Victor Dergunov

Market participants and analysts alike appear to be too cautious on financials.

Bank stocks have underperformed the market over the past year and are extremely cheap right now.

JPMorgan kicks off banks' earnings season with a bang, and stellar results are likely a prelude to the broader banking sector's performance in Q1.

I provide three of my favorite financial names and discuss why they may be a good fit for your portfolio.

Banks are likely to report higher-than-expected earnings, should go through a multiple expansion cycle, and could outperform the market going forward.

Banks Source: CNN.com

3 Financial Stocks To Consider For Your Portfolio

Despite producing a strong rally from the December bottom, the financial sector has underperformed over the last year and is down by around 4% over the past 52 weeks. Market participants appear to be cautious on financials as a possible slowdown approaches.

However, the financial sector is better regulated than it was in the mid-2000s, and it is not likely that the same sector would spearhead a financial crisis two times in a row. Also, many financial/bank stocks are extremely cheap and provide substantial dividends.

Financials are well positioned to outperform in this late leg of the current bull market and are an important cornerstone to a diversified portfolio. In this article, I provide three of my favorite financial stocks and explain why they may be a good fit for your portfolio.

1. Goldman Sachs (GS) is a remarkable money-making machine. Moreover, Goldman typically makes money in good times as well as in times of heightened volatility and market turmoil. Goldman Sachs is expected to release earnings on Monday before the bell, and I expect a beat on both EPS and revenues, which will likely cause the stock to extend its recent rally.

Goldman has a tendency for beating earnings, and as many companies experienced drops in revenues and profits, Goldman thrived in Q4 2018. The company reported a blockbuster quarter, beating profit estimates by 36%, and delivering $530 million more in revenues than the street expected.

Despite the stellar results, this stock is extremely cheap and remains down by about 22% over the past year. Goldman trades at only 8.6 times this year's consensus estimates and at a remarkably low 7.7 times next year's expected earnings. In addition, the company pays a 1.6% dividend and remains in a very favorable market position going forward.

I expect the company to continue to beat EPS and revenue estimates, which suggests the stock may be even cheaper than it appears.

GS 1-Year

Goldman Sachs chart Source: StockCharts.com

The technical image is also quite strong with Goldman, as the stock has been consolidating around the $190-200 level for 3 months. Now, the stock is likely to go for a breakout soon, and shares could appreciate to the next major level of resistance at $230.

Incidentally, $230 is Goldman's consensus 12-month price target, and higher end estimates go up to $312. Goldman is currently trading at the very low end of analysts' estimates, would need to appreciate by 12% to get to consensus figures, and would have to surge by over 50% to achieve higher-end price target estimates.

2. KeyCorp (KEY) is a mid-cap regional bank with operations in 15 states in the U.S. The company is known for providing a strong customer service experience and is expected to provide modest revenue growth this year and in 2020.

KeyCorp also beat analysts' estimates in its most recent quarter, providing revenues of $1.65 billion, $20 million above estimates, and beating EPS as well. KeyCorp provides an outstanding 4.13% dividend and currently trades at less than 9 times this year's consensus estimates. Moreover, the company is expected to deliver $1.98 in EPS next year, suggesting the stock is trading at just 8.2 times forward earnings right now.

KEY 1-Year

We can see that KeyCorp made a higher low following the December bottom, and the stock is likely to follow through with a higher high going forward. This will likely establish a strong uptrend that may last for several quarters and could send shares substantially higher.

Furthermore, KeyCorp is currently trading towards the very low end of analysts' 12-month price target range. Price target estimates range from $16 to $25.5, with a consensus estimate of $19.

It appears that analysts are expecting a multiple expansion, earnings beats, or possibly, a combination of the two. In any case, KeyCorp would need to appreciate by 16% to get to the consensus price target and would need to surge by about 56% to get to higher-end estimates.

3. Sberbank (OTCPK:SBRCY) is the largest bank in Russia, Central, and Eastern Europe. In fact, Sberbank is an enormous institution with nearly 300,000 employees and operations spanning much of the globe.

Sberbank is 50% plus 1 voting share owned by the Russian Central Bank, which essentially means it is majority-owned and controlled by the Russian government. While this may seem counterproductive, it is a favorable factor as government backing provides Sberbank with a wide range of advantages and takes a certain degree of uncertainty out of the equation.

Also, this type of ownership structure is not uncommon in Russia, as other industry juggernauts like Gazprom (OTCPK:OGZPY) are also majority owned by the state. Nevertheless, about 43% of Sberbank's shares are estimated to be owned by foreign investors.

So, Why Invest in Russia?

Russia is a very robust and growing market. In fact, much of Central/Eastern Europe, where Sberbank operates has substantial potential for growth going forward. Also, Russia recently went through a recession and is now producing robust GDP growth. Russia has achieved above 2% GDP for several quarters, with the latest reading reaching 2.7%, the country's best reading in years.

Russian GDP Growth

Source: TradingEconomics.com

Another factor to consider is that Russia is still very cheap. If we look at global CAPE ratios, Russia by far has the lowest P/E ratios and is the only major economy that is trading in the single digits right now (7.86). Nevertheless, we see that Russia's CAPE is increasing and has expanded from the lows, 5-6 level in recent years.

This trend is likely to continue, as there doesn't appear to be a legitimate reason why Russian companies should sell at such deep discounts to their Western and Asian counterparts. Should Russian stocks be selling at a 3 to 1 discount to Indian companies? Or at a 4 to 1 discount to U.S. businesses? I believe no, so we are likely to continue to see multiple expansion amongst Russian equities.

Sberbank saw net income rise by about 11% last year. Moreover, the bank is expected to earn $2.58 this year (mean estimate) and $2.88 next year. The stock is trading at around $15 today, which indicates Sberbank is trading at just 5.9 times this year's expected earnings and at 5.3 times next year's projections. Additionally, Sberbank offers a very nice 5% dividend on top of its incredibly compelling valuation.

Technical View

SBRCY 1-Year

Sberbank We see that Sberbank has skyrocketed by about 50% since the December lows. In fact, the RSI recently went over 80, so it's safe to say that shares are dramatically overbought on a short-term basis right now. Therefore, I would not rush out and buy this stock today. However, on a pullback, Sberbank could be a good addition to a diversified portfolio and likely has a lot more upside potential longer term.

JPMorgan Kicks Off Earnings Season with a Bang

JPMorgan's (JPM) earnings are likely to serve as a prelude to the broader banking sector's results this earnings season. Another one of my long-time favorite bank stocks is JPMorgan, which recently reported another stellar quarter, sending shares higher in the process. Furthermore, the recent beat, and subsequent up move in shares is likely just the beginning of a broader move higher in JPMorgan as well as in the broader banking sector.

JPMorgan rose by about 5% on Friday, as the bank delivered much better than expected quarterly results. JPMorgan's profits and revenues rose by about 5% YoY, handsomely beating analysts' estimates. Net income rose to about $9.18 billion, or $2.65 per share, beating consensus estimates of $2.35 by around 13%. Revenues came in at $29.9 billion, beating estimates by around $1.5 billion.

JPMorgan's much better than expected results illustrate that analysts and market participants alike are much too bearish on the banking space, the sector represents great value and is likely to outperform going forward.

Bottom Line: Why You May Want to Own Financials

Financials are cheap right now, and as the current leg of the bull market progresses, banks are likely to outperform as a combination of multiple expansions and better-than-expected earnings should propel stock prices higher from here.

Moreover, delinquency rates are at some of their lowest levels in years, and there is no indication that delinquency/default rates are going to rise imminently.

Source: St. Louis Fed

Also, we've seen financials rally in late stages of bull cycles in the face of rising delinquency rates before. This supports the thesis that a recession may be a year or more out from now, and financial stocks may have ample room to rally here.

Amongst my favorite financial names are Goldman Sachs, KeyCorp, and Sberbank. These stocks are remarkably cheap and have substantial upside potential in my view. Moreover, with these names, you get exposure to the best in investment banking, regional banking, as well as international, Central/Easter Europe exposure, which offers substantial growth possibilities.

Disclosure: I am/we are long JPM, GS, KEY, SBRCY, OGZPY. 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.

Additional disclosure: This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please consider consulting a professional before putting any capital at risk.