6 Favorite Financials: Value Stocks to Take to the Bank

We retain our enthusiasm for the long-term prospects of equities in general, and our broadly diversified portfolios of what we believe to be undervalued stocks in particular, notes leading value investing experts Jason Clark and Chris Quigley, contributors to MoneyShow and editors at The Prudent Speculator. JPMorgan Chase -- the nation's largest bank -- released another solid earnings report, carrying its momentum through year end. The bank earned $2.57 per share against $2.36 of expected earnings, supported by average deposit growth of 7% year over year. JPM continues to earn solid returns on its capital, producing a 17% ROTCE in Q4 and 19% for the full fiscal year, even while maintaining a robust common equity capital ratio of 12.4%. We remain quite fond of the bank's fortress balance sheet and the overall business model under CEO Jamie Dimon's guidance. We believe that the deepening budget for investment in technology enabled through existing scale and diversification of revenue sources creates a virtuous circle for the financial behemoth and that the bank will continue to operate at a high level for the foreseeable future. The shares were recently trading for just 12.8 times next 12-month projections, while carrying a dividend yield of 2.6%. Our target price for the stock has been elevated to $155. Diversified financial firm Bank of America reported another solid quarter as adjusted Q4 EPS came in at $0.74, versus consensus estimates of $0.69. The quarter benefited from a 4% increase in average loan growth, continued positive operating leverage and strong asset quality, with credit charge-offs remaining low. The consumer bank grew average deposits 5%. The bank's trading and securities services saw a material improvement in results, and Merrill Lynch realized 25% more net new households than it did in 2018. BAC's efficiency ratio came in at 59%. Credit quality remains solid and the stock was recently trading for 11.4 times next 12-month estimated EPS. We continue to be fans of Bank of America and see it as one of our core financial holdings. While there will continue to be near-term pressure on net interest margin in this low rate environment, we see numerous long-term opportunities, from its large deposit base and consumer lending franchise to its thundering herd of Merrill Lynch's financial advisors and wealth managers. Our target has been inched up to $44. Diversified bank Citigroup reported adjusted Q4 EPS of $1.90 (vs. $1.84 est.). Revenue for the period also came in better than forecasts ($18.38 billion vs. $17.88 billion est.), growing a better-than-expected 7%. With improving operational execution and business lines in faster growth markets around the globe (vs. its U.S. business), offset by headwinds from the potential for lower interest rates for longer, we believe that Citi shares offer investors more upside, despite an extremely strong 2019. The stock was recently priced at just 9.4 times next 12-month adjusted EPS expectations and 98% of book value. We continue to see a more focused and recapitalized Citigroup as prepared to reward investors over the long-term. We like that Citigroup has good leverage towards the solid U.S. economy, while also having the potential to show outsized benefits versus its peers from growth in Asia, Latin America and other emerging economies. Even though the company faces plenty of operational hurdles in different segments of its business, we think the bank is on its way to achieving its low-50s efficiency-ratio target by end of 2020. Our target price has been bumped up to $109. Investment banking and securities firm Goldman Sachs Group posted Q4 revenue 16% higher than expected led by trading and asset management. Despite the strong top-line results, adjusted earnings per share of $4.69 fell well short of expectations ($5.52) because of materially elevated litigation costs and expenses (much of it the hit coming from the scandal around 1MDB, a Malaysian development fund). Capital ratios and book value increased year-over-year, while Q4 ROE was muted at 9%, materially impacted by the litigation charge, though full-year adjusted ROE was healthy at 12%. The firm ranked #1 in worldwide announced and completed mergers and acquisitions for the year and also ranked #1 in worldwide equity and equity-related offerings and common stock offerings for the year. We continue to be long-term fans of GS, and given the strong revenue trends, improving macro backdrop, strategic repositioning towards growth, an improving efficiency ratio and active capital management, we believe the company can achieve stronger growth, operating leverage and a potentially higher multiple than the current forward P/E of 10. The ultimate goal of Goldman's evolution is to change the trading and deal-making titan into a more well-rounded financial firm with more stable consumer and commercial businesses. That said, we won't be surprised if it takes a few years for the efforts to begin to be truly rewarded by investors. Our target price now stands at $292. Global financial services giant Bank of New York Mellon posted adjusted Q4 EPS ($1.02 vs. $1.01 est.) that topped analyst projections. Assets under custody and/or administration rose 12% on a year-over-year basis to $37.1 trillion, reflecting higher market values and client inflows. Meanwhile, assets under management climbed 11% to $1.9 trillion, also due to higher market values, as well as the favorable impact of a weaker U.S. dollar (principally against the British pound), though AUM was offset by net outflows. The company also bought back 22.2 million common shares for $1.04 billion during the quarter. Despite the seemingly good news, shares sank nearly 9% over the next two days as worries about higher expenses and low interest rates spooked investors. On the earnings conference call, management indicated that costs could rise by as much as 2% in 2020, while the company must contend with compression in both net interest and fee income. As a result, analysts are now looking for full-year EPS a little lighter than $4.20. Of course, the recent share price hardly seems rich, given that it represents 11 times next 12-month earnings expectations (historically, Bank of New York Mellon has traded for 13.5 to 14 times earnings), while we believe the company maintains a strong market position (particularly in its Pershing business and certain other asset services offerings) and that investments in technology will likely lead to a stickier client base in the future. We also appreciate the bank's generous capital returns to shareholders as evidenced by the reduction of shares outstanding by a little over 6% over the past year, and history of annual dividend increases. Our target price for BK now stands at $61. PNC Financial Services reported adjusted Q4 2019 earnings that trailed analyst estimates. The regional bank earned $2.89 per share (vs. $2.91 est.) and had net interest margin of 2.78%, down 6 basis points, due to lower interest rates. PNC reported growth in loans, deposits and revenue, but the loan-loss provision expense increased, eating at earnings. The efficiency ratio for the full year was 59%, which management attributed to more than $300 million of cost savings and continuous improvement program (CIP). Despite the prolonged low interest rate environment, stiff competition for deposits and heavy regulatory burden, PNC has found ways to continue to show respectable loan and deposit growth with strong overall credit quality. We think the firm's focus on organic loan growth is an important performance driver and we remain pleased with the company's ability to control costs and drive fee income. We support management's continued effort to expand into new markets, and we think the asset management business will add to the bottom line. Additionally, we note that PNC owns 22% of Blackrock , the largest asset management firm in the world. PNC recently traded for around 13 times next 12-month earnings and yields 3.0%. Our target price is $177.

6 Favorite Financials: Value Stocks to Take to the Bank

These undervalued names fit well in a diversified portfolio.

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