3 Very Different Undervalued Financial Companies

Includes: COF, DB, DFS
by: Benjamin Goldman

Most financial stocks took huge hits last summer, but since have rebounded after investors realized that the European debt crisis did not affect these companies as much as originally thought. Even though many financial stocks like Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS) have had strong rebounds in the last couple of months, there are still some good value buys out there. In this article, I go over three of the better ones.

Capital One Financial (NYSE:COF)
Capital One is a bank holding company with a lot of potential going forward. Capital One's revenue is derived mainly from its credit card business, home loans, and car loans. The company acquired ING, USA last month, and has a promising earnings outlook going forward. Its current P/E ratio is around 7.5 because its earnings are expected to decrease in 2012. However, earnings per share is expected to bounce back in 2013 giving the company a 2 year forward P/E of 7.7. Overall, Capital One's earnings will probably grow at a slower rate than the market, justifying a lower P/E ratio, but I believe that the stock is currently undervalued and could potentially return between 12% and 20% in the next year.

Discover Financial Services (NYSE:DFS)
Discover is the fourth largest credit card issuer and fourth largest card brand in the United States. Shares have increased by 34.5% in the last three months, and I believe that there is still some room left for more stock price growth. Discover's bullish activity is common among credit card brands like Visa (NYSE:V), American Express (NYSE:AXP), and MasterCard (NYSE:MA), as they have all beaten the market over the last three months and over the last year. As mobile payments technology improves and credit card issuers continue to push rewards programs, these companies will continue to reap the benefits of a digital world. The company's earnings are expected by analysts to increase at similar levels to the market, yet shares trade at a P/E ratio under 8. I believe that Discover can be a $40 stock (it currently trades at $32.04) by the end of 2012.

Deutsche Bank (NYSE:DB)
With the European debt crisis still ongoing, I believe that Deutsche Bank still has a lot of recovery room left. Shares traded under $29 last summer and now the stock is expected to eclipse the $50 mark by the end of this week. Deutsche Bank is my favorite large cap European bank right now for two reasons. First, Germany is probably the most economically stable large power in Europe right now, so even though Deutsche Bank was under scrutiny, the issues the bank had were most likely over-exaggerated. Second, there is still a lot of rebound room left. DB shares haven't traded above $80 since the 2008 financial crisis. Barring disaster in Europe, Deutsche Bank shares could potentially trade as high as $70 by year end with a more realistic expectation around $60. In addition, the company is expected to experience 16.3% earnings growth annually over the next five years and is trading at a forward P/E ratio of under 7.

Many investors make financial stocks a large part of their portfolios. They tend to be a lot more risky due to high leverage and high competition, but can have huge payoffs during bull runs. When looking at financial stocks, I urge investors to look beyond just the major deposits banks and investment banks in the United States. There are plenty of other options out there like Capital One, Discover, and Deutsche Bank, which can help diversify your portfolio and generate great returns.

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

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