What follows is a list of financials with various degrees of upside. The cover a variety of industries: insurance, regional banking, and mortgage REITs. I remain highly bullish on the sector due to my belief that the market is irrationally discounting future streams of free cash flow. The market is overly negativity due to the emotional scars over the financial crisis, Dodd-Frank regulations, and general media attention. Many financial companies are equipped with top management and fundamentals. I strongly recommend MetLife and Barclays; I recommend Annaly Capital only to those willing to closely monitor the stock.
MetLife trades at a respective 5.5x and 5.4x past and forward earnings with a dividend yield of 2.5%. Consensus estimates forecast MetLife's EPS growing by 4% to $5.22 in 2012 and then by 7.9% and 9.6% in the following two years. Assuming a multiple of 8x and a conservative 2013 EPS of $5.60, the stock will hit $44.80 for 48.3% upside.
With the market trading at a multiple several folds higher than MetLife, the downside is also fully low. The economy is moving, albeit sluggishly, towards full employment and the stock has a beta of 1.9 to drive outperformance. The futures are also bullish on the company.
Barclays trades at a respective 7.3x and 4.1x past and forward earnings with a dividend yield of 3.4%. Consensus estimates forecast Barclays' EPS growing by 55.9% to $2.37 in 2012 and then by 18.6% in the following year. Assuming a multiple of 8x and a conservative 2013 EPS of $2.33, the stock would hit $18.64 for 70% upside.
From late December 2012 to around mid-March, Barclays was a strong performer. The stock is now down by around 39% from its local peak two months ago. Given that the stock has a beta of 2.6, it is well positioned to recover lost shareholder value when the economy recover. This is reflected in both the firm's high growth rate and high dividend yield.
Annaly Capital (NYSE:NLY)
Annaly trades at a respective 33x and 7.9x past and forward earnings with a divined yield of 13.6%. Consensus estimates forecast Annaly's EPS declining by 23.3% to $1.97 in 2012, growing by 4.1% in 2013, and then declining by 2.9% in 2014. Assuming a multiple of 10x and a conservative 2013 EPS of $2, the stock will hit $20 for 23.8% upside.
Management pays out earnings through its dividend yield, but has had to cut the distribution several times now. Part of the reason why Annaly is undervalued stems from management's inability to articulate trends. This has put investors on the edge in marked contrast to the stock's "cult fans". While the stock isn't volatile, investors should stay on alert and not be misled into thinking the stock is a safe income generator. Active monitoring is key to a successful Annaly investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.