Financials Still Have Some Value

 | Jan 07, 2014 | 11:00 AM EST
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Financial shares rose by a third in 2013, posting their strongest performance since 1997. With economic growth accelerating and the gap between short-and long-term interest rates widening, there still seems to be some upside in the sector over the next 12 months.

Although these financial stocks are not as cheap as they were to begin 2013, there are still some values in the sector. Here are three that should do well in the New Year.

Bank of America (BAC) --The stock of this major bank has tripled off its lows in 2011 but the shares are still just a third of their level before the financial crisis.

The bank should be buoyed in 2014 by an accelerating economy, widening net interest margins and continued improvement in credit quality and write offs. It should also benefit by a housing recovery that is expected to continue a rebound, albeit at a slower rate than 2013.

It is hoped that the bank will also see a lessening of litigation and regulatory actions by the end of the year. I also expect the bank to get permission from the Federal Reserve to substantially raise its dividend by the end of 2014. The stock is still relatively cheap at under 80% of book value and earnings should show a better than 35% year-over-year gain in earnings in 2014.

Morgan Stanley (MS) --The company has done a marvelous job of expanding its wealth management business and of reducing its exposure to non-client trading. This will serve this financial institution well as the measures within Dodd-Frank get fully implemented.

The company's transformation is starting to show up in its earnings results where Morgan Stanley has easily beat bottom line estimates for four straight quarters. The stock easily outperformed the overall market in 2013 but still sells right at book value.

The stock is not the screaming value it was to begin 2013 but still sells for less than 13x forward earnings, a discount to the overall market multiple. Earnings should show at least 20% year over year growth this year on a 4% to 6% increase in revenues.

American International Group (AIG) --This major insurance stock has been a core holding in my portfolio for quite some time. Its CEO, Robert Benmosche, belongs in the taxpayers' Hall of Fame. He has done a marvelous job selling assets at favorable prices and AIG has paid back every cent of government money -- an outcome that no one envisioned when he took the helm of the company in 2009.

The stock has had a marvelous run over that time frame but should still be a solid performer in the years ahead. The stock sells for less than book value and should benefit nicely from the rise in interest rates. The company has beat consensus earnings estimates on the bottom line for six straight quarters and AIG also sells for less than 12x current earnings.

All of these financial stocks posted stellar years in 2013. I don't expect the same kind of returns in 2014. I believe, however, that all three concerns are well-positioned to outperform what is likely to be a more subdued market in 2014.

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