The financial sector was hit hard last year. In addition to witnessing higher default rates due to the economic effects of the coronavirus pandemic, their financials were negatively impacted by the low-interest-rate environment and the central bank’s asset purchases. As the financial sector’s health is causally related to the health of the economy, it suffered in particularly in the first two quarters of 2020.
The sector garnered huge momentum in the third quarter, with the economy registering an annual growth rate of 33.4% (off an exceptionally low base). Positive developments on the vaccine front helped improve economic sentiment. The widely held expectation is that an effective mass vaccination drive will catalyze an economic revival this year. Also, the Federal Reserve’s recent round of stress testing found U.S. banks to be sufficiently healthy to withstand adverse financial conditions caused by the pandemic.
The pandemic turned out to be less of a headwind than expected for some financial stocks. And a few companies within the consumer financial services and investment banking services industries have recovered significantly from their March lows. The sector underperformed the overall broader market in 2020, as evidenced by the Financial Select Sector SPDR ETF’s (XLF) 4.3% loss versus the S&P 500’s 15.4% returns in 2020. However, XLF’s 22% return over the past three months reflects solid short-term bullishness.
Increasing optimism among investors about the industry’s recovery this year and a rising long-term treasury yield outlook have been helping the industry regain significant investor attention. Further, Fed officials project the U.S. economy to grow at a rate of 4.2% in 2021.
Easier lending conditions, moderate inflation, a steepening yield curve, and a strong investor rotation into value stocks should continue boosting financial stocks throughout 2021. Based on this, we think JPMorgan Chase & Co. (JPM), Visa Inc. (V), Morgan Stanley (MS) and The Goldman Sachs Group, Inc. (GS) are the four best sector picks to play the recovery.
JPMorgan Chase & Co. (JPM)
JPM is a leading global financial services firm with assets of $3.2 trillion and operations in more than 60 countries worldwide. The firm is a leader in investment banking, commercial banking, and asset management. It operates in four segments – Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM).
JPM excelled in the second round of stress tests conducted by the Fed last month. The firm’s Basel III Standardized approach minimum Common Equity Tier 1 (CET1) capital ratio remained at 11.3%, inclusive of the Stress Capital Buffer (SCB) requirement of 3.3%. Consequently, the company’s board has approved a new common equity share repurchase program of $30 billion.
JPM will host a conference call on January 15 to discuss its financial results for the fourth quarter and full year 2020 ended December 31, 2020. In the third quarter, ended September 30, 2020, JPM posted revenue of $29.9 billion, which was relatively flat to the year-ago quarter. The company set aside $611 million as provision for credit losses and to maintain its credit reserves at $34 billion. While average its loans were up 1%, average deposits surged 30% year-over-year. Its EPS for the quarter came in $2.92, rising 112% sequentially.
JPM is benefiting greatly from its strong capital, massive reserves, and solid liquidity position. Its client-driven business model and footprint expansion have allowed it to capture significant market share in several operations. Hence, analysts expect JPM’s current year EPS to grow 23.7% year-over-year.
How does JPM stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
A for Industry Rank
A for Overall POWR Rating.
You cannot ask for better. It is ranked #1 in the 11-stock Money Center Banks industry.
Visa Inc. (V)
V is a global payments technology company that enables the use of digital currencies. The company facilitates commerce through the transfer of value and information. It operates VisaNet, a processing network that enables settlement of payment transactions. In addition, the company offers card products, as well as value-added services.
In November, V announced a strategic partnership with Conferma Pay, a virtual payments technology provider, to launch Visa Commercial Pay, a suite of B2B payment solutions. The service is designed to help improve cash flow for businesses and eliminate outdated manual processes. The company also acquired YellowPepper in November, a fintech pioneer with proprietary technology and partnerships that supports leading financial institutions and startups. This acquisition is accelerating the adoption of V’s “network of networks” strategy.
V is scheduled to hold its 2021 Annual Meeting of Shareholders on January 26. In its fiscal fourth quarter ended September 30, 2020, the company reported net revenue of $5.1 billion, falling 17% year-over-year as total cross-border volume weakened. However, its payments volume increased 4% while processed transactions surged 3% over the prior year on a constant-dollar basis. Its non-GAAP EPS came in at $1.12, declining 23% year-over-year.
V has largely benefited from the spike in e-commerce sales last year. The company is expanding its Visa Direct program and B2B partnerships and has made significant progress in advancing its growth strategy through acquisitions and alliances. Consequently, analysts expect V’s revenue and EPS to grow 6.3% and 8.1%, respectively, this year.
V’s strong fundamentals are reflected in its POWR Ratings, it has a “Strong Buy” rating with an “A” in Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is also ranked #1 of 47 stocks in the Consumer Financial Services industry.
Morgan Stanley (MS)
MS is a leading global financial services firm that provides a wide range of investment banking, securities, wealth management and investment management services. With offices in more than 41 countries, the firm serves clients worldwide including corporations, governments, institutions, and individuals. MS operates through Institutional Securities, Wealth Management, and Investment Management segments.
MS last week completed an investment in Georgia-based SolMicroGrid, a developer and operator of microgrid systems for commercial and industrial customers. The strategic partnership aims to support the growth of SolMicroGrid’s business, which offers innovative microgrid solutions through an Energy-as-a-Service (EaaS) business model. And last month, MScompleted an investment in Advanced Web Technologies, which operates as AWT Labels & Packaging and Citation Healthcare, a Midwest-based private equity firm.
MS is scheduled to report results for the fourth quarter on January 20. The company reported net revenues of $11.7 billion for the third quarter ended September 30, 2020, surging 16% year-over-year, driven in part by the firm’s trading division, which saw a revenue bump of 20%. The bank’s fixed-income trading operations generated its highest third-quarter revenue in a decade, helping the firm’s total revenue hit a post financial crisis record. Its EPS came in at $1.66, compared to the year-ago value of $1.27.
MS has been Wall Street’s most aggressive acquirer with more than $20 billion in takeovers last year. The company is also restructuring its operations to focus on less capital-dependent revenue sources, such as wealth management and investment management. As a result, analysts expect MS’ full-year 2020 revenue and EPS to decline 10.6% and 12.3%, respectively.
It is no surprise that MS is rated “Strong Buy” in our POWR Ratings system. It holds a straight “A” in Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. In the 25-stock Investment Brokerage industry, it is ranked #1.
The Goldman Sachs Group, Inc. (GS)
GS is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments, and individuals worldwide. It functions through four segments – Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management.
GS also cleared the Fed’s stress test last month, and issued a statement highlighting its intent to resume share repurchases next quarter. In addition, GS recently invested $500 million in MaC Venture Capital I, a California-based seed-stage venture capital fund. In line with its commitment of more than $1 billion to small businesses since the start of pandemic, the firm funded an additional $250 million last week as part of its 10,000 Small Businesses program.
GS will hold an earnings webcast on January 19 to discuss its fourth quarter financial results. In the third quarter, the company reported a top-line of $10.78 billion, growing 30% year-over-year, reflecting significant increases in Asset Management and Global Markets. The firm set aside $278 million as provision for credit losses to maintain its credit reserves at $4.33 billion. Investment banking contributed $1.97 billion to its top-line, which included its second highest quarterly net revenues in equity underwriting. EPS came in at $9.68, more than doubling year-over-year.
GS saw increased earnings and revenue backed by its underwriting business, lower provisions, and escalated costs last year. The company should see further gains as M&A activity picks up this year. GS’ business diversification, cost management initiatives, and strong liquidity should buoy the company going during the current economic downturn. Analysts further expect its current year EPS to rise 27.5% year-over-year.
GS’ POWR Ratings reflect this promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Out of 25 stocks in the Investment Brokerage industry, GS is rated #3.
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JPM shares were trading at $139.80 per share on Tuesday morning, up $1.75 (+1.27%). Year-to-date, JPM has gained 10.81%, versus a 1.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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