7 Financial Stocks to Buy to Get Ready for the Fed’s Next Move

Written By: InvestorPlace
Reviewed by: Mike Reyes
Last Updated November 1, 2023

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Financial stocks could be on the verge of higher returns. Rising inflation levels over the summer months convinced investors that the Federal Reserve would soon pump the brakes on its monetary stimulus program. Now it seems an imminent interest rate hike is looming around the corner.

Higher interest rates often lead to increasing profit margins for banks and other financial institutions, so many investors are now wondering if the recent volatility in broader markets could be an opportune time for buying financial shares. Against this backdrop, I’ll discuss seven financial stocks to buy for the Fed’s next move.

Equities declined for the most part in September. For instance, the Dow Jones, the S&P 500 and Nasdaq 100 were down 4.2%, 5.0% and 5.9%, respectively. In addition to profit-taking, sustained high inflation brought on the nervousness. Furthermore, the debt ceiling debate in Washington added to the down mood on Wall Street, pushing bond yields higher.

As the Consumer Price Index increased 5.3% over the past year, it’s only a matter of time before Fed starts increasing interest rates in the coming months. Given that loan growth has been non-existent for the last year, rising interest rates are poised to push financial stocks higher in the coming months.

Here are 7 of the best financial stocks to buy for the Fed’s next move:

  • American Express (NYSE:AXP)
  • Bank of America (NYSE:BAC)
  • Citigroup (NYSE:C)
  • Cowen (NASDAQ:COWN)
  • Financial Select Sector SPDR Fund (NYSEARCA:XLF)
  • JPMorgan Chase (NYSE:JPM)
  • M&T Bank (NYSE:MTB)

Financial Stocks to Buy: American Express (AXP)

52 week range: $89.11 — $179.67

Dividend yield: 0.97%

American Express provides global consumers and businesses with charge and credit card payment products. The company additionally operates a highly profitable merchant payment network.

Management issued Q2 results in late July. Revenue increased 33% year-over-year (YOY) to $10.2 billion, nearly matching 2019 levels. The company posted a net income of $2.3 billion, or $2.80 per diluted share, compared to $257 million, or 29 cents per diluted share, in the previous year. Cash and equivalents ended the quarter at $31 billion.

On the results, CEO Stephen J. Squeri remarked:

“Our strong second-quarter results show that the steps we have taken to manage the company through the pandemic and our strategy of investing to rebuild our growth momentum are paying off.”

Developing new and improved programs is a critical factor for the company’s overall growth strategy. Millennials and Generation Z customers fueled growth during the second quarter, with total spending up 30% over 2019 levels for this group.

Its focus on attracting a younger clientele should drive the bank’s growth in future quarters. As a leading name in rewards cards, the company is also well-positioned to benefit from improvements in travel spending by large businesses. Management recently forged a partnership with Extend, a financial technology (fintech) company specializing in virtual cards.

The stock hit an all-time high of $179.67 in July. AXP stock does not look cheap, currently hovering around $168 and up more than 46% year-to-date (YTD). AXP shares trade at 19 times forward earnings and 5.50 times book value. A further decline toward $165 or below would improve the margin of safety.

Bank of America (BAC)

52 week range: $23.12 — $43.49

Dividend yield: 1.94%

Bank of America is one of the largest financial institutions in the U.S., with more than $2.5 trillion in assets. It operates under four major segments: consumer banking, global wealth and investment management, global banking, and global markets.

Management announced Q2 results in mid-July. Revenue, net of interest expense, decreased 4% YOY to $21.5 billion. The bank reported a net income of $9.2 billion, or $1.03 per diluted share, compared to $3.5 billion, or 37 cents per diluted share, in the prior-year quarter.

CEO Brian Moynihan cited, “We delivered solid earnings and returned more capital to shareholders during the quarter as we moved to a more open economy.”

Bank of America is a compelling stock to consider as the surge in rates is expected to transfer profits directly to the bank’s bottom line in terms of loans. Expanding digital offerings, opening additional branches, and effective cost management efforts contribute to the bank’s financial performance.

BAC stock hit a 52-week-high of $43.49 in June. The stock continues to trade at around $42.5 territory, and has returned 40% so far this year. Despite hovering close to the recent peak, BAC shares look reasonably priced, given that they trade at only 1.40 times book value and 14 times forward earnings.

Citigroup (C)

52 week range: $40.49 — $80.29

Dividend yield: 2.90%

With its global consumer and institutional banking operations, Citigroup needs little introduction. The financial services group released Q2 results in mid-July. Total revenue declined 12% YOY to $17.5 billion. Net income came in at $6.2 billion, or $2.85 per diluted share, compared to $1.1 billion, or 38 cents per diluted share, in the previous year.

CEO Jane Fraser remarked:

“The pace of the global recovery is exceeding earlier expectations and with it, consumer and corporate confidence is rising. We saw this across our businesses, as reflected in our performance in Investment Banking and Equities as well as markedly increased spending on our credit cards.”

The bank aims to boost profit margins by focusing on its core lines of business with high returns, such as investment banking, wealth management, and securities services. Therefore, it is exiting consumer banking in 13 non-core international markets. Instead it will put resources in high growth wealth management centers, including Singapore, Hong Kong, and London.

Citigroup is flush with cash due to its recent asset sales and strong profitability. The bank is also aggressively repurchasing shares, which should further boost the stock price. In addition, its dividend yield is higher than most of its rivals at 2.90%.

C shares currently hover at $70 territory, up 14% YTD. Its P/B ratio of 0.80x suggests that the stock is trading lower than the value of its assets. It may therefore be an excellent opportunity to go long on Citigroup stock, which trades at nine times forward earnings.

Cowen (COWN)

52 week range: $15.39 — $44.07

Dividend yield: 1.13%

Next on our list is Cowen, a leading middle-market independent investment bank. The group offers investment management, research, sales and trading, and prime brokerage services.

Cowen announced Q2 results in late July. Non-GAAP revenue decreased 30% YOY to $390 million. Non-GAAP net income came in at $50.8 million, or $1.50 per diluted share, compared to $166.9 million, or $5.69 per diluted share, in the prior-year period.

Following the results, CEO Jeffrey M. Solomon remarked:

“The second quarter of 2021 was a clear demonstration of Cowen’s core earnings power and the growing breadth and depth of our capabilities across the platform. It was the third-best quarter ever for investment banking and markets and the fourth best quarter overall in terms of both revenues and profitability.”

The bank focuses on emerging industries, such as cannabis, healthcare, and biopharmaceuticals. Cowen is also well-known for special purpose acquisition company (SPAC) deals. Management is confident about long-term growth prospects.

COWN stock is currently trading at $34.5 per share, and is up 36% YTD and 135% over the past year. Despite its streak of record revenue, COWN stock remains considerably undervalued, given that it trades at 5.4 times forward earnings and only 0.90 times book value.

Financial Select Sector SPDR Fund (XLF)

52-Week Range: $23.25 — $39.04

Dividend Yield: 1.58%

Expense Ratio: 0.12% per year

The Financial Select Sector SPDR Fund invests in financial institutions stateside. Initially listed in December 1998, XLF has become the go-to exchange-traded fund (ETF) for exposure to heavyweight financials.

XLF currently has 65 holdings and the top 10 names account for over half of net assets of $40.9 billion. In terms of sectors, the fund primarily consists of banks (38.70%), followed by institutions operating with capital markets (26.84%) and insurance companies (16.75%).

The top names in the roster include Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), JPMorgan Chase, Bank of America, Wells Fargo (NYSE:WFC), and Morgan Stanley (NYSE:MS).

The ETF has gained 27% in 2021 and 55% over the past 52 weeks. It hit an all-time high of $39.04 on August 30. It currently hovers at 37.5. The fund trades at 13.86x trailing earnings and 1.67x book value.

JPMorgan Chase (JPM)

52 week range: $94.33 — $167.44

Dividend yield: 2.40%

With more than $3 trillion in assets, JPMorgan Chase is one of our largest financial institutions. It is organized into four major segments: consumer and community banking, corporate and investment banking, commercial banking, and asset and wealth management.

JPMorgan Chase announced Q2 results in mid-July. Revenue declined 7% YOY to $31.4 billion. The bank reported a net income of $11.9 billion, or $3.78 per diluted share, compared to a net income of $4.7 billion, or $1.38 per diluted share, a year ago.

On the results, CEO Jamie Dimon remarked:

“JPMorgan Chase delivered solid performance across our businesses as we generated over $30 billion in revenue while continuing to make significant investments in technology, people and market expansion.”

JPMorgan has a tremendous scale in consumer and investment banking, which means various competitive advantages against its smaller rivals. Its $10 billion annual tech budget provides the bank with technological tools that most other banks cannot easily match.

It has recently launched its new digital bank in the U.K. under the Chase brand. It has also acquired Frank, a college financial planning platform that helps millions of students and their families navigate their finances.

JPM stock trades at slightly above $165. It gained over 3% YTD and 80% in the past year. JPMorgan isn’t the cheapest bank on Wall Street, but it makes perfect sense to buy a premium quality bank at a moderate price. The stock trades at almost twice its book value and 14 times forward earnings.

M&T Bank (MTB)

52 week range: $90.15 — $168.27

Dividend yield: 2.91%

New York-based M&T Bank is one of the largest regional banks in the U.S., with branches in New York, Pennsylvania, Virginia, West Virginia, Maryland, New Jersey, and Delaware. The bank was initially established to serve manufacturing and trading businesses around the Erie Canal.

M&T Bank released Q2 results in late July. Total revenue came in at $1.47 billion during the second quarter. The bank reported net income of $458 million, or $3.41 per diluted share, compared to $241 million, or $1.74 per diluted share, in the prior-year quarter.

CEO Darren J. King remarked:

“Reflecting signs of economic recovery, we were encouraged by the increased customer activity experienced during the recent quarter, particularly associated with debit and credit cards.”

M&T Bank focuses primarily on commercial real estate lending in the Northeast. It currently continues to deal with loans affected by the pandemic. Thus, it is highly sensitive to interest rates, given the nature of its lending specialty.

In a surging interest rate environment, M&T Bank should have more upside potential. In addition, M&T’s recent acquisition of People’s United, a bank based in Connecticut with $60 billion in assets, should allow it to gain an important foothold between Buffalo, N.Y., Washington, D.C., and Boston.

MTB stock hovers at $150, up 19% YTD. It is currently trading at 12 times forward earnings and 1.25 times book value. Despite some short-term headwinds, this is an opportunity for long-term investors to buy a strong-performing bank stock at a historically low valuation.

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation

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