2022 has not been a good year for financial services stocks. The S&P 500 financial sector index has fallen 18% since the start of the year.
But as of June 27, the decline left more than 70% of North American financial stocks covered by Morningstar undervalued. Analysts at the research and financial services firm determine a fair value for each stock they cover.
“The median North American financial stock is trading at a 21% discount to its fair value estimate, compared to a 1% discount at the end of Q1 2022 and a 2% premium at the end of Q1 2022. fourth quarter 2021,” Michael Wong, Morningstar director of equity research for North American Financial Services, wrote in a commentary.
Now may be the time to consider financial stocks.
To be sure, financial companies still face headwinds. “For banks, loan write-offs should start to rise as the buffer of savings that consumers have accumulated is spent,” Wong said.
“Banks also experienced abnormally high mortgage refinancing, underwriting, merger advisory and trading revenues in 2020 and 2021, and these revenue streams are expected to normalize downward over the next two years.”
Meanwhile, with U.S. stocks and bonds plummeting, “asset and wealth managers with asset-based fees will experience lower earnings until markets recover,” he said. Wong.
But on the positive side, the Federal Reserve’s interest rate increases are “benefiting the profits of many financial companies,” Wong noted.
Here are his top picks for financial stocks.
black rock
(noir) – Get the BlackRock Inc. report.
Morningstar credits BlackRock with a wide gap and puts the stock’s fair value at $880, 41% above the recent trade at $623.
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“BlackRock has made harder trade-offs than other asset managers this year, but there is no fundamental reason for it to lag its peers in performance,” he said. .
“The company is above all a passive investor. … In an environment where investors are looking for passive products, as well as larger scale asset managers, established brands, strong long-term performance and reasonable fees, BlackRock is well positioned.
Citigroup
(VS) – Get the report from Citigroup Inc.
Morningstar gives the banking giant no ditch and puts the stock’s fair value at $78, 66% above the recent trade at $47.
“Citigroup is the most undervalued mainstream U.S. bank under our coverage and is trading below tangible book value,” Wong said.
“The bank is busy shedding underperforming segments, refocusing its operations on core competencies and geographies, and dealing with consent orders from regulators. Additionally, Citigroup is not one of the most rate-sensitive names, which we believe contributes to its current lack of popularity.
Goldman Sachs
(GS) – Get the report from Goldman Sachs Group Inc. (The)
Morningstar assigns it a narrow gap and puts the stock’s fair value at $430, 44% above the recent trade at $298.
“Goldman Sachs … will likely face headwinds over the next couple of years as investment banking and trading revenues normalize down from high levels in 2020 and 2021,” Wong said. . “We think a lot of that is already priced into the stock price.”
Over the medium term, Goldman should benefit from “initiatives that should improve its earnings stability, such as its push into consumer banking and changes to its investment management business,” Wong said.
The author of this story owns shares of BlackRock and Goldman Sachs.
