Financial stocks have taken a big hit in the market's recent pullback, but several advisors see long-term opportunities in the private equity, asset management and investment banking sectors. From small-cap managers to Wall Street's largest investment banks, here are nine ideas from MoneyShow.com experts.
Paul Dykewicz, The Global Guru
Main Street Capital Corporation (MAIN) is a business development company (BDC) that has found a unique and profitable niche of financing and investing in small and medium-sized businesses.
The BDC outperformed all of its peers with a net asset value that rose 19% in the past year and 52% for the last year. Main Street produces consistent growth and has an enticing monthly dividend yield of about 5.9%.
Main Street Capital grew its net investment income 8 percent to $115.8 million, or $2.23 a share, in 2016, compared to 2015. Further growth is projected when the company reports its 2017 financial results on Feb. 22.
Main Street Capital now has more than $3.7 billion in capital under management and investments in close to 200 companies. It provides debt financing and equity investments in lower-middle-market companies, along with debt financing for middle-market companies. A unique characteristic of lower-middle-market companies is that they have a reduced correlation to broader debt and equity markets.
Main Street Capital has been providing its investors gains from both capital appreciation and dividend payments. A recent pullback in the price of the shares gives those who have been waiting on the sidelines an opportunity to invest at a reduced price.
Chuck Carlson, DRIP Investor
If I had to pick one asset class that should outperform in 2018, it would be financials. Rising rates should help net interest margins, a stronger economy should spur loan demand, and tax reform should be especially impactful to the group.
If you could own only one financial for 2018, it should be JPMorgan Chase (JPM) . The company is well leveraged to the economic and interest-rate climates I expect in 2018. The stock's dividend yield of 2.1% enhances total-return prospects.
Secondary market corrections are designed to scare the heck out of investors, which the current correction seems to be doing. It is important to take advantage of secondary corrections.
The financial sector has pulled back with the market, making JPMorgan a more attractive opportunity. I continue to favor JPMorgan among the money center banks and would feel comfortable buying on any weakness.
JPMorgan's direct-purchase plan has a minimum initial investment of $250. The firm will waive the minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of at least $50. There is a one-time enrollment fee of $15. The plan administrator is Computershare.
Douglas Hughes, BankNewsletter
Oppenheimer Holdings (OPY) is the cheapest investment bank around, based on a price to book, price to earnings, or any measure you want to use; in addition, it has a super-smart guy running the shop.
The company recently announced what may be the best quarter they have ever had. They blew away earnings estimates by 25% to the upside, plus a huge tax gain of over $10 million from the new tax laws. Wow, what a quarter.
They even bought back 450,000 shares at $15.75; these are impressive buys. The stock has had a huge run, but again it could double from here now with $4.00 to $5.00 in earnings power this year; if rates keep going up they will make a small fortune.
I think with the earnings power peaking this year or next, they can now get $50 a share in a buyout, almost a double again from here. Not many shares are left with that latest buyback done and insider ownership so high.
They didn't raise their cash dividend and didn't announce a new buyback plan. Granted the stock is way up, but that idea that they didn't put a new plan in place or pay a special cash dividend strikes me that they are going to now sell their firm.
Jason Clark, The Prudent Speculator
While the Wall Street titan Goldman Sachs (GS) continued to deal with brisk headwinds in its Fixed Income, Currency and Commodity trading business, the firm turned in a Q4 bottom-line beat (excluding tax legislation) that was more than 15% higher than investors were expecting.
The firm also said it ranked first in worldwide announced and completed mergers and acquisitions for 2017, with its investment banking division producing its second highest annual net revenue number ever ($7.37 billion).
Also during 2017, Investment Management generated record net revenue of $6.22 billion, including record management and other fees. Assets under supervision increased 8% from 2016 to a record $1.49 trillion, with net inflows in long-term assets under supervision of $42 billion.
Looking to 2018, we view the revenue outlook as mostly favorable given rising GDP growth, a higher Investment Banking pipeline, internal growth initiatives, tax reform benefits and relatively easy trading comparable numbers.
While expenses were larger than expected in Q4, we believe Goldman is locked in on keeping them under control, as well as managing its capital. Management guided to a 2018 tax rate of approximately 24%.
We continue to be long-term fans of Goldman Sachs and are constructive on the name, given the prospects for stronger revenue growth, operating leverage, potential de-regulatory policies and a potentially higher earnings multiple than the recent forward P/E of less than 12. Our target price has been boosted to $286.
Todd Shaver, BullMarket.com
It was a truly exceptional year for The Blackstone Group (BX) , reflected by outstanding earnings growth and record capital activity that drove their highest-ever level of aggregate cash distributions to shareholders.
Total revenue ended the year at $7 billion, up 39% from last year. EPS of $2.21 compared to just $1.56 a year ago, a huge 42% jump. This business is grooving! It was another strong quarter of core business trends.
Specifically, total assets under management increased an elevated 12% sequentially to a record $435 billion, driven primarily by $62 billion of inflows. Capital deployment of $20 billion in the quarter represented a record.
And dry powder remained elevated at $95 billion, which bodes well for future capital deployment levels. Just to put that in perspective, Blackstone realized half of the $7 billion of revenue this year from carried interest on prior year inflows that were deployed to generate big gains of which Blackstone gets a percentage of the profits.
Blackstone's tireless drive to innovate has enabled the company to launch large-scale new product areas that reach a wider client base and serve existing clients in new ways.
Investors, in turn, have entrusted the company with more capital than ever before, leading to a new record total assets under management of $435 billion, up 18% year over year. The stock is a good value at just 10x the current EPS of $3.25.
Richard Moroney, Upside
Stifel Financial (SF) was upgraded to a Best Buy rating on Jan. 9 because of its strong operating momentum, reasonable valuation, and excellent scores in Quadrix, our proprietary quantitative ranking system.
The investment firm reported impressive December-quarter results on Jan. 30. Adjusted for a handful of items, including a $101 million charge related to the new tax code, per-share earnings were $1.47, up from $0.68 and above the consensus of $0.63. Revenue jumped 22% and topped expectations.
Stifel's effective tax rate was 23.9%, down from 36.6%. Pretax operating margin hit 20.1%, compared to 13.5% in the prior-year period. On Dec. 30, client assets were $272.6 billion, up 15%. Lastly, the company hiked the quarterly per-share dividend 20% to $0.12. Earning an Overall score of 95, Stifel is rated Best Buy.
Evercore (EVR) reported strong December-quarter results. Adjusted per-share profits were $1.55, up 8% and above the consensus of $1.23. Earnings exclude a charge of $143.3 million related to a deferred tax asset.
Revenue rose 5% to $466, compared to the consensus of $407 million. Advisory fees rose 8%, while underwriting revenue jumped 24%. Operating margin rose slightly to 28.8%.
The investment banking firm participated in 18 underwritings, up from 14 in the year-earlier period. Evercore, a top pick among financial stocks, is a Best Buy.
Founded in 1899, Legg Mason (LM) is a leading asset manager, overseeing some $767 billion. Its Western Asset unit, a global bond manager for institutional clients, accounts for 57% of assets under management. Retail brands include Royce Funds and Brandywine.
Healthy equity markets, product launches and rising interest rates have boosted results. In the December quarter, per-share earnings more than doubled on revenue growth of 11%. Total assets rose 8% while operating margin was 27.2%, the highest in nearly 10 years.
Rising analyst estimates call for Legg Mason to grow per-share profits 65% to $3.62 in 2018. The consensus, which was $2.82 a month ago, partly reflects a lower U.S. tax rate. Revenue is expected to climb 8% to $3.11 billion.
Legg Mason has a 2.6% dividend yield, and the firm spent $374 million on stock buybacks during the fourth quarter, trimming the share count 9% from a year earlier. Legg Mason, with a Value rank of 95, is being initiated as a Buy recommendation.
Stephen Biggar, Argus Research
Morgan Stanley (MS) is a diversified global financial securities firm. Its businesses include institutional securities sales and trading, investment banking, retail securities brokerage and institutional asset management.
In our view, Morgan Stanley has made significant progress in lowering its risk profile, strengthening its capital buffers and reducing earnings volatility.
In particular, the wealth management segment, which has a more stable revenue and profit profile, now accounts for nearly 50% of revenues and risk-weighted assets continue to decline. Results in this segment have also been helped by the company's focus on high-net worth and ultra-high net worth clients, which are seeing the fastest growth.
We expect Morgan Stanley's wealth management franchise to continue to benefit from improvement in the value of financial assets. Meanwhile, growth in compliance costs for Dodd-Frank and other measures has subsided, allowing for margin improvement.
A lighter regulatory environment should also allow for a focus on business-line expansion. Lastly, improving regulatory capital levels should lead to strong increases in the share buyback program and dividends. We believe that Morgan Stanley will have several more years of above-average dividend increases as capital levels improve.