The quarterly earnings season is on, and the banks were among the first to come out with their results on Friday. JPMorgan Chase (JPM) led the way in reporting upbeat results. But as some analysts expected, the stocks pulled back despite beating expectations. Strangely, that usually happens on the day they start releasing their earnings performance.
But on the whole, Wall Street continues to favor the financials on expectations of moderate economic growth and higher short-term interest rates, which bode well for margin expansion at asset-sensitive banks and brokers. So investment managers and institutional research firms have been focusing on selecting those financial stocks that remain attractively valued because the group has started to outperform in the current record-breaking equity market.
Financial stocks have performed strongly year-to-date through late June, climbing about 20 percent versus the S&P 500's 9 percent, noted investment firm Keefe Bruyette & Woods, part of Stifel Financial (SF).
So analysts at KBW have come up with a list of 10 financial stocks they believe will outperform in the second half of 2017.
"KBW recommends owning firms that benefit from short-term higher rates while being cautious on yield curve-dependent financials," said Frederick Cannon, director of research at KBW. And the expected relaxation of regulations should benefit banks, particularly institutions with assets under $250 billion, he argued, as well as banks whose assets are approaching $50 billion and have growth opportunities.
Cannon also expects an acceleration in mobile banking and for financial companies to continue acquiring technology companies. So KBW recommends "owning networks that can best benefit from financial technology M&A."
Leading KBW's top 10 financial stock picks are two large-cap stocks, Visa (V) -- with a market capitalization of $177.2 billion -- and Bank of America (BAC) -- at $245 billion. KBW Managing Director Sanjay Sakhrani has a price target of $111 a share for Visa, which is currently trading at $96. And Brian Kleinhanzani, also a managing director, has a price target of $27 for Bank of America, currently trading at $24 a share.
"Visa looks relatively cheap when compared to the market and Mastercard (MA)," said Sakhrani, and "we believe Visa has comparable, if not stronger, fundamentals versus Mastercard." He added that Visa could see further upside through "additional synergies from the Visa Europe, capital management and relatively stable market conditions."
On Bank of America, Kleinhanzani said buying the stock is "buying a higher-quality bank at a discounted multiple." He expects the bank's earnings per share to increase by 24 percent in 2018, versus 14 percent for most of its peers. He also noted that Bank of America's strength in its "deposit franchise remains underappreciated." The stock's valuation, he added, "is still attractive relative to peers and the market."
Here's the full list of KBW analysts' top 10 financial stocks that they see as attractively priced and should perform superbly:
1) Visa, the world's largest retail electronic payments network and major card provider. Its stock is very close to exceeding its 52-week high of $96.66.
2) Bank of America, the giant U.S. commercial and investment bank, trading at $24 is very close to its 52-week high of $25.80.
3) American International Group (AIG), a global insurance company, trading at $64 a share, not very far from its 52-week high of $67.47.
4) PennyMac Financial Services (PFSI), a mortgage and investment company, trading at $17 a share, not far from its 52-week high of $19.35.
5) United Financial Bancorp (UBNK), a financial holding company for United Bank that provides multiple banking services. Its stock is at $17 a share, slightly off its 52-week high of $18.66.
6) Bank United (BKU), a holding company for BankUnited National Association that provides banking services to small and midsize businesses and individuals. It's trading at $32 a share, below its 52-week high of $41.
7) Western Alliance Bancorporation (WAL), a holding company for Western Alliance Bank that provides banking services primarily in Arizona, California and Nevada. It's trading at $49 a share, off from its 52-week high of $53.84.
8) Carlyle Group (CG), an investment firm that specializes in direct and "fund of fund" investments, is trading at $20.22 a share, very close to exceeding its 52-week high of $20.85.
9) Vantiv (VNTV), a not widely known provider of electronic payment processing services to merchants and financial institutions in the U.S. It's trading at $64 a share, not far from its 52-week high of $66.24.
10) D.R. Horton (DHI), primarily engaged in acquiring and developing land and construction of homes in 27 states. It's trading at $36 a share, just a bit off its 52-week high of $37.44.