Monday, December 4, 2023
Stocks To Buy

The 7 Most Undervalued Financial Services Stocks to Buy in September 2023

If you’re looking for financial services stocks to buy, look no further. Bank stocks have underperformed by a wide margin this year. So far in 2023, the S&P Banks Select Industry Index (INDEXSP:SPSIBK) has declined 15% compared to a 17% gain in the benchmark S&P 500 index. The poor performance has been caused by a full-blown banking crisis this spring that saw several regional lenders in the U.S. collapse, including Silicon Valley Bank and Signature Bank. There is also concern about a credit crunch prompted by interest rates that have been raised by the U.S. Federal Reserve to their highest level in 22 years in order to combat inflation, and rising levels of consumer debt. It’s all conspired to shake confidence in stocks of financial services firms and send their share prices sharply lower.

This should be seen as a buying opportunity among investors, especially as stocks of some of the most stable and well-capitalized lenders in the world are now available to buy at extreme discounts to their intrinsic value. While many tech stocks look grossly overvalued after tripling since the start of this year, bank stocks look woefully undervalued by comparison. Here are the seven most undervalued financial services stocks to buy in September 2023.

Charles Schwab (SCHW)

Charles Schwab’s (NYSE:SCHW) stock is down 25% on the year and currently trading at just 17 times forward earnings. The banking crisis this past spring and concerns about the company’s bond losses have pulled share price lower. It stood at $28 billion earlier this year, about the same level as Silicon Valley Bank before its collapse. Those concerns look to be abating now, though, and SCHW stock appears to have bottomed in mid-May of this year. Since then, the company’s share price has gained nearly 30%.

Other reasons to consider Charles Schwab when looking at financial services stocks to buy now is that it is one of the 10 largest financial services companies in the U.S. The company offers a diverse range of products that include retail banking, commercial banking, investing services, and wealth management advisory. It currently has nearly 35 million brokerage accounts and more than $7 trillion of assets under management. While SCHW stock has been knocked lower this year, the share price is up 20% over five years and it has tripled in the past decade.

Bank of America (BAC)

Bank of America (NYSE:BAC), the second largest financial services company in the U.S., looks extremely undervalued right now. BAC stock is down 18% over the last 12 months, bringing its five-year return to a negative 4%. The lender’s shares are currently trading at nine times future earnings, and the shares offer a quarterly dividend of 24 cents for a best-in-class yield of 3.30%. At this valuation, Bank of America looks like a no brainer for buy-and-hold investors.

One wouldn’t know it looking at the stock’s performance, but Bank of America continues to outperform on the earnings front. In July, the company reported second quarter financial results that beat Wall Street expectations on both the top and bottom lines due to higher interest rate income. Also this summer, Bank of America settled a legal issue with the Consumer Financial Protection Bureau, agreeing to pay a fine for charging unnecessary fees to clients. The settlement lifts a cloud from BAC stock, paving the way for it to reverse higher.

Morgan Stanley (MS)

Morgan Stanley (NYSE:MS) isn’t your average investment bank. Outgoing CEO James Gorman has shifted the company’s focus to wealth management, which has helped the financial firm achieve consistent earnings amid the current drought in Wall Street deals such as mergers and acquisitions (M&A) and initial public offerings (IPOs). This diversification has set Morgan Stanley apart and enabled it to produce strong Q2 financial results, beating analysts’ expectations across the board.

For Q2 of this year, Morgan Stanley announced EPS of $1.24, which beat consensus expectations of $1.15. Revenue in the April through June period totaled $13.46 billion versus $13.08 billion that had been forecast. Sadly, the diversification and strong financials haven’t helped MS stock. The share price hasn’t moved at all this year and is down 4% over the last 12 months. Morgan Stanley too pays a strong quarterly dividend that yields nearly 4%, and its stock is changing hands at 15 times forward earnings.

Mastercard (MA)

Mastercard (NYSE:MA), which specializes in consumer credit cards and is the second-largest payment-processing company in the world, is another financial services concern that has reported strong earnings this year. The strong results led MA stock to hit a record intraday high on July 27 of this year, the day its Q2 print was made public. However, the company’s share price is only about 5% higher than where it was when the market peaked in autumn 2021, having swooned during last year’s downturn.

Mastercard recently announced a plan to recycle billions of plastic credit and debit cards, diverting them from landfills around the world. Under the plan, Mastercard is providing shredding machines to issuers of its credit and debit cards, each of which will be able to hold 10,000 cards. The move to reduce its plastic waste has garnered the financial services company some positive media coverage. MA stock pays a quarterly dividend of 57 cents a share, which is good for a yield of 0.55%.

Goldman Sachs (GS)

Next on the list of financial services stocks to buy now is investment bank Goldman Sachs (NYSE:GS), which just announced several changes to its executive leadership team. It also announced plans to sell part of its wealth management business as it moves to focus on serving ultra-rich clients. These moves are the latest efforts by the financial services company to right its own ship following a period of chronic underperformance. Goldman Sachs CEO David Solomon is under pressure to improve the bank’s results after reporting the firm’s lowest quarterly profits in three years this summer, and amid negative press coverage.

A two-year slump in investment banking activity related to IPOs and M&A activity hurt Goldman’s profits. The company has announced 3,200 job cuts this year and plans to cut expenses by $1 billion over the coming two years. In a series of recent interviews, Solomon said that the firm is returning its focus to its core businesses of investment banking. The shifting tides come as GS stock has fallen 4% this year. The shares now trade at 14 times future earnings and pay a strong quarterly dividend that yields 3.29%.

Capital One (COF)

Shares of Capital One Financial Corp. (NYSE:COF) could use a boost. The company specializing in credit cards, auto loans, banking, and savings accounts for retail clients has seen its share price decline 8% in the last 12 months. Through five years, COF stock is up a marginal 3%. Right now, Capital One’s shares are trading at only seven times future earnings and they pay a dividend of 60 cents per quarter, giving it a decent yield of 2.37%.

A weak credit market and rising delinquency rates on credit cards and other loans have attributed to the decline of COF stock. However, at least one prominent investor doesn’t seem to be worried and sees the current valuation on Capital One as a buying opportunity. In May of this year, Warren Buffett bought nearly $1 billion of COF stock. Buffett now owns 12.47 million shares of Capital One. Buffett’s position was a vote of confidence in Capital One, especially since he has sold nearly all of his other bank holdings.

UBS Group (UBS)

Admittedly, UBS Group (NYSE:UBS) is a bit of an outlier here as the Swiss banking giant’s share price has gained 36% since January of this year. However, the stock still looks undervalued right now compared to where the financial services company is likely headed following its takeover of former rival Credit Suisse. The lender just recently reported a record profit of $29 billion after it concluded the Credit Suisse acquisition. While UBS stock is at a 52-week high right now, the shares are trading at only 2.5 times future earnings projections.

UBS agreed to buy troubled Credit Suisse this spring at a price of $3.2 billion, which according to Wall Street was a complete steal. UBS finalized the takeover in June, and now has access to Credit Suisse’s large wealth management business. Executives at UBS said that they anticipate costs savings of $10 billion by the end of 2026 as they reduce the size of their workforce. Like the other financial services firms on this list, UBS pays a healthy dividend that yields 2.15%, or a payout of 14 cents a share per quarter.

On the date of publication, Joel Baglole held a long position in BAC. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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