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The latest earnings reports are showing certain financial stocks are outperforming expectations. With technology stocks looking a bit winded after a long run upward, companies involved in investing, insurance and other financial services are gaining interest.
The three financial stocks to buy offer increased potential opportunity for pursuing potent profits. Investment banks, insurance companies and financial technology companies all benefit with increase rates fall and the spread widens between the money they receive and the funds they pay out.
"Prior to World War II, price inflation was temporary and caused by wars," wrote Mark Skousen, PhD, in the August 2024 issue of his Forecasts & Strategies investment newsletter. "But since World War II, inflation has become permanent, a result of creating the Federal Reserve in 1913, abandoning the gold standard in 1933 and 1971, adopting Keynesian economics and deficit finance and engaging in never-ending wars engulfing the United States."
Skousen's conclusion is that inflation is here to stay and he cited the chart below as proof.
Three Financial Stocks to Buy Offer Potential for Investors: Goldman Sachs (GS)
New York-based investment firm Goldman Sachs (NYSE: GS) is regarded as a strong "buy" recommendation by BofA Global Research. Goldman Sachs, a stock that I personally have owned for several years, received a $563 price target from BofA.
Goldman Sachs Chief Executive Officer David Solomon met with BofA banking analysts recently and highlighted "significant opportunities'' to drive growth and improve returns. The analysts wrote a July 30 research note indicating the stock offers among the best "risk-reward" prospects in their coverage area and positive earnings per share (EPS) revisions.
The BofA banking analysts wrote the Solomon discussed plans for gaining market share, fending off competition, navigating regulatory changes and driving Goldman Sachs toward an improved and durable return on equity (ROE). The CEO cited three key catalysts to boost the performance of Goldman's stock.
One catalyst is the likely pick-up in mergers and acquisition (M&A) activity, the BofA analysts wrote. A "backlog" of such potential deals is growing. Indeed, BofA wrote that M&A deal value is tracking 3.0% of S&P market cap year to date (YTD) vs. 9.0% for a five-year, pre-pandemic median. Post-election, no matter who wins the presidency, and Fed rate-cuts should serve as catalysts to boost EPS revisions), the analysts wrote. A pick-up in investment banking activity has high correlation to ROE, further supporting the stock's price-to-earnings multiple expansion, according to the research note.
Chart courtesy of www.stockcharts.com.
Three Financial Stocks to Buy Offer Potential for Investors: Asset Management Lift
Solomon cited the leadership position of Goldman Sachs in asset management, including private credit, the BofA analysts wrote. In addition to secular growth tailwinds in private credit and wealth, Asset and Wealth Management (AWM) remains a margin improvement story, they added.
Margin improvement, plus rising contribution from AWM to the bottom line, portend improved ROE and higher stock multiples, BoA wrote in its research note.
Despite a recent set-back during the Fed's annual stress-test, actions taken to de-risk Goldman Sachs balance sheet should lead to lowered capital requirements over the medium term, the BofA analysts opined. Notwithstanding operating at elevated capital levels, Goldman Sachs delivered ROE of 13.3% in the first half of 2024, after adjusting for roughly a 50 basis points drag from enterprise platforms, the analysts added.
"We consider any significant stock market correction that puts into question EPS/ROE upside from the rebounding investment banking activity as a near-term risk, but view any potential pullback as offering a particularly attractive buying opportunity," the BofA analysts wrote.
Skousen has been recommending Goldman Sachs in his Forecasts & Strategies investment newsletter's Flying Five portfolio of his five favorite dividend-paying, bargain-priced stocks since July 23, 2023. As of July 30, the share price had risen 55.07% before factoring dividend payments. With $11 in dividends paid by Goldman Sachs since the time of the recommendation in the Forecasts & Strategies investment newsletter, the total return on the investment is 58.91%.
Ben Franklin scion Mark Skousen, who heads TNT Trader, talks to Paul Dykewicz.
Three Financial Stocks to Buy Offer Potential for Investors: Aon Corp. (AON)
London-based Aon plc (NYSE: AON), a global risk management and human capital services provider, received an "outperform" rating from Chicago-based investment banking firm William Blair. Aon reported an 18% jump in its second-quarter 2024 revenues of $3.8 billion. That gain included a 6% rise in internal organic revenue growth.
Also in the second quarter, Aon completed its acquisition of NFP, a middle-market provider of risk, benefits, wealth and retirement plan advisory solutions, for $13 billion enterprise value. Aon also rewarded its shareholders by repurchasing 0.8 million of its class A ordinary shares for approximately $250 million.
The risk-management company also announced what it described as a first-of-its kind, public-private solution to build insurance capacity and accelerate new capital investments and recovery in Ukraine, bringing total capacity to $350 million.
William Blair wrote that Aon's second-quarter cash earnings per share (EPS) of $2.93, rose 6%, but missed the investment firm's $3.03 estimate and consensus forecast of $3.09. The shortfall stemmed mainly from a higher-than-expected tax rate attributed to discrete items and geographical mix, the investment firm wrote.
"Organic growth appears to have turned the corner, and potential for increased middle-market M&A activity could modestly raise the top-line growth profile," William Blair's analysts wrote.
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Erie Indemnity Co., of Erie, Pennsylvania, provides a variety of insurance products to its customers that include auto, homeowners' coverage and business insurance. It also is engaged in providing life insurance, long-term care rider insurance, Medicare supplement and personal umbrella insurance.
Erie reported operating earnings per share PS of $3.17 for the second quarter. Premium growth keeps accelerating as an effect of rate actions. Despite rising premium prices, new business and retention levels remain strong, according to the William Blair investment firm that tracks the stock and rates it as "outperform."
The investment firm expects Erie's top-line growth to remain in the mid- to high-teen percentages. Erie's policy issuance margin has been increasing as a result of investments in technology efficiency and should remain strong going forward as commission costs stay consistent as a percentage of premiums and technology drives down expenses, William Blair's analysts wrote in a recent research note.
Investment operations are an added benefit, with yields rising to 6% in the quarter, the analysts added. The combination of growing management fee income and investment income should allow Erie Indemnity to maintain a positive earnings performance through 2025, with William Blair's estimates suggesting growth in the 20% to 30% range.
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Another fan of financial stocks is Jim Woods, who heads the Successful Investing newsletter and co-leads the Fast Money Alert advisory service. Woods recommended a financial services fund in his weekly Successful Investing update that he calls a "hotline."
Jim Woods leads Successful Investing and co-heads Fast Money Alert.
He placed the recommendation in his Tactical Trends Portfolio. That fund includes shares in all the biggest banks and financial institutions in the market today, he informed his subscribers.
Those and the financial stocks that make up the key sector SPDR exchange-traded fund (ETF) pegged to perform along with the industry's fortunes. To learn more about that fund, read my column about dividend-paying investments this Friday, July 2.
The three financial stocks to buy offer potential for investors to profit powerfully as interest rates are expected to be cut by the Federal Reserve as soon as September. Those expected interest rate cuts are a key reason why financial investments appear to be ripe for picking. | | | Sincerely,
Paul Dykewicz, Editor
StockInvestor.com
| | About Paul Dykewicz: Paul Dykewicz is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul also is the author of an inspirational book, "Holy Smokes! Golden Guidance from Notre Dame's Championship Chaplain", with a foreword by former national championship-winning football coach Lou Holtz. Follow Paul on Twitter @PaulDykewicz. | | | | | |
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