These 6 Financial Favorites Have a Wealth of Positives

With expectations for rising earnings and dividends -- and a strong market that has boosted wealth management operations -- the leading investment banks are considered a relative value in today's market. Here, several top experts, and contributors to MoneyShow.com, review their best bets in the financial services and Wall Street banking business. Stephen Biggar, Argus Research Wells Fargo & Co. is one of the largest diversified financial services firms in the United States. It provides a full range of consumer banking, commercial banking, and investment banking services. Wells originates roughly one of every four residential mortgages in the U.S. After the Federal Reserve's stress test review in June 2020, the company reduced its quarterly dividend to $0.10 per share from $0.51 -- in order to comply with the Fed's requirement that dividends not exceed average net income over the preceding four quarters. We look for the dividend to be increased following the 2021 stress test. We expect near-term revenues to be hurt by lower lending volumes and narrower margins following the Fed's emergency rate cuts; however, we believe that high loss provisions have abated, with the recapture of further reserves possible if credit defaults remain low. On April 14, WFC reported first quarter earnings of $1.05 per share, up from $0.01 a year earlier and above the consensus of $0.70. Revenue rose 2% to $18.1 billion, as higher investment and mortgage income outweighed the impact of lower interest rates on net interest income. The shares are down some 27% over the past year, versus a 49% advance for the broad market. WFC shares are trading at an elevated P/E ratio due to depressed earnings, driven by revenue and credit cost headwinds from the coronavirus. Still, we expect an earnings rebound in 2021-2022, and see a strong potential catalyst for the shares in the removal of the asset cap. The stock trades at 1.2-times tangible book value, below historical levels as the company works through depressed earnings caused by low interest rates, and at 13.3-times our 2021 EPS estimate. WFC traded at depressed multiples prior to the pandemic, hurt, we believe, by the sales practice scandal and the subsequent cap on assets. We expect valuation to improve as the company overcomes these challenges. We are maintaining our buy rating and have raised our target price to $47 from $37, implying a multiple of about 15-times our 2021 estimate. Tom Hutchinson, Cabot Dividend Investor KKR & Co. , formerly Kohlberg Kravis Roberts Co., is a leading global alternative asset manager. The firm manages multiple alternative asset classes including private equity, energy, infrastructure, real estate, credit, as well as hedge funds through strategic partners. It generates revenues from management fees, performance income and investment income with a global reach on five continents. A booming economy and rising interest rates are a great environment for financial companies. The rest of this year should be very good for the sector. But KKR is also the best player in a massive growth trend in the wealth management industry. Alternative investment is a longer-term trend. These investments are growing like crazy. Global alternative asset investments have grown from $6.4 trillion in 2012 to about $14 trillion in 2020. It is estimated that alternative assets worldwide will continue to grow to more than $21 trillion by 2025. I consider KKR to be the best of its peers in the sector. It has blown away the return of its competitors over the past five years, averaging an annual return of 35.86% over the last five years and 36% over the last three. And there are good reasons to believe the outperformance will continue. KKR had an all-time record fundraising year in 2020, bringing in $44 billion in assets under management for the year. A record $12.5 billion was deployed, or invested, in the fourth quarter. And the firm still has plenty of dry powder going forward. Despite the recent stellar performance, KKR recently sold at a price/earnings ratio of less than 14 times. That's well below the five-year average and less than half of the current S&P 500 price earnings ratio. The stock has moved sideways for the last six weeks after a big surge and could be consolidating ahead of another move higher in the weeks ahead. Ben Reynolds, Sure Retirement Lazard Ltd. is a global financial advisory and asset management firm. Its financial advisory business offers various advisory services, including mergers and acquisitions, and capital raising. Lazard was founded in 1848 and is based in Bermuda. The business is classified as a partnership and issues a K-1. Despite not being based in the U.S., the company's distributions are typically not subject to dividend tax withholdings for U.S. investors. The company should produce ~$2.8 billion in revenue this year, and trades with a market capitalization of $5.0 billion. Competitive advantages in Lazard's business are gained nearly entirely from reputation, as the sorts of things Lazard does can be found in countless other companies as well, so competition is high. However, Lazard has built a strong reputation over the past 170+ years and enjoys a strong and growing book of business because of it. Our only caution is that reputations take a long time to make but can be lost quickly in this business. Unsurprisingly, Lazard performed poorly during the Great Recession, as its customers suffered and therefore spent less with Lazard. However, it rebounded quickly, and during 2020's recession, Lazard grew earnings quite nicely. Still, this is not a recession-resistant stock. We see average annual growth of 5% in the coming years for Lazard from our base of $3.78 in earnings per share for 2021. Lazard continues to be the global leader in restructuring deals, providing a strong source of high-margin revenue. Lazard is also a beneficiary of higher stock market values as that produces higher AUM, but market depreciation can see large declines in AUM as well. In total, we see robust 9.5% annual returns from Lazard, which results from the combination of 5% projected EPS growth, a 4.0% dividend yield, and a 1.0% tailwind from the valuation. Jason Clark, The Prudent Speculator JPMorgan Chase saw another massive quarter in its trading and investment banking divisions and a $5.2 billion credit reserve release contributed to $4.50 of earnings per share (vs. the $3.01 analyst estimate). Deposits continued to climb in the period, up more than 30% over the last 12 months to nearly $2.3 trillion by quarter-end. Loan demand remains tepid, however, as corporate clients continue to opt for capital markets access for liquidity over drawing from bank loans. The loan book is conservatively positioned, with one of the highest CET1 ratios of its peer group and existing loans that remain well reserved for credit losses. JPM continues to operate at a very high level, producing 29% returns on average common equity and an efficiency ratio below 60%, while growing tangible book value per share by 10% year-over-year. With the pandemic hopefully headed for the rear-view mirror, America's largest bank is set up nicely to benefit from robust economic growth expected over the next few years. JPM is a systemically important bank that is still growing its branch network and the company expects to have a presence in all lower 48 states by July. It trades at an attractive 12 times the consensus 2021 earnings estimate with a dividend yield of 2.4%. Our target price has been hiked to $176. Goldman Sachs Group turned in another blowout quarter; it reported a top-line of $17.7 billion, which was more than 41% higher than expectations, and adjusted EPS of $18.60, more than 84% better than the consensus analyst estimate of $10.07. Strong activity levels, a healthy balance sheet and sound strategic repositioning have us thinking that GS shares remain quite attractive for the long-term, especially given the fantastic results the company has been able to produce the last year, including $30.68 of adjusted EPS in the last two quarters. We would not be surprised to continue to see strong earnings versus competitors because of the company's lower interest-rate exposure. The build out of its traditional banking and investment-management businesses should serve shareholders well in the long run, as almost two-thirds of Goldman's revenue still comes from its investment banking and global markets trading business segments. 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 businesses, which we believe continues to progress. That said, we realize that it may take some time for the efforts to begin to be truly rewarded by investors. Our target price has been raised to $398. Despite turning in a sensational first quarter, shares of Morgan Stanley fell as the company announced during its earnings release that it had suffered a $911 million loss as part of the Archegos family office debacle. For the quarter, the firm managed to deliver adjusted earnings per share of $2.22, more than 31% greater than forecasts looking for $1.68. Morgan Stanley continued to show strength in Wealth Management and Investment Management, and the first quarter also saw strong results in Investment Banking and Trading. We like the diversifying acquisition of Eaton Vance and we also believe the recently closed purchase of E-Trade gives MS greater scale in tech, a deeper product and service base, and self-directed investors to complement advisor-assisted wealth-management clients. In the near-term, we believe MS will benefit from continued strong capital market activities and we see the opportunity to take larger wallet share in wealth management. While financial continue to face headwinds in the low-interest-rate environment, we are constructive on MS's lower exposure to consumer and commercial loans, the healthy balance sheet and the relatively inexpensive valuation. Our target price has been lifted to $94.

These 6 Financial Favorites Have a Wealth of Positives

Top experts discuss their best bets in the financial services and Wall Street banking group.

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