Investors should go overweight in the financial sector, advises Goldman Sachs Group Inc. (GS) in a recent report, based on "increased capital return, further deregulation, strong M&A advisory fees, net interest margin expansion, solid loan growth, and attractive valuation and growth dynamics." Of the 23 banks analyzed by Goldman, these four stand out with the highest projected gains to their target prices: trust bank State Street Corp. (STT), money center banking institution Bank of America Corp. (BAC), regional bank Citizens Financial Group Inc. (CFG) and card issuer Capital One Financial Corp. (COF).
Purely coincidentally, each of these companies represent one of the four categories of banks as presented in the U.S. Weekly Kickstart report dated May 18. All also are buy-rated by Goldman.
Key Driver: Interest Rates
Rising interest rates represent the major reason why Goldman recommends that investors go overweight in financial stocks, particularly bank stocks. As interest rates rise, banks normally increase their net interest rate spreads between what they pay to depositors and what they charge to borrowers, thus widening their profit margins.
Observing that the yield on the 10-Year U.S. Treasury Note reached 3.11% last week, Goldman adds that the year-to-date increase has been 71 basis points (bp) year-to-date and 29 bp during the past month. Their economists project a gradual increase to 3.25% by the end of 2018, and to 3.60% by the end of 2019. The forward market, meanwhile, points to rates of 3.16% and 3.22%, respectively.
For these four stocks, here are their implied gains to Goldman's price targets, projected 2019 EPS growth rates, and projected growth in returns of capital to shareholders during the 12 months through June 2019:
|Gain to Target||2019 EPS Growth||2019 Capital Return Growth|
|Bank of America||20%||13%||32%|
Returns of capital include both dividends and outlays on share repurchases. All price data is as of May 17.
More Banks With Upside
Among the 23 stocks in the report, four others have projected gains to a target price of 14% or more. These are: Regions Financial Corp. (RF), 19%; Northern Trust (NTRS), 17%; Comerica Inc. (CMA), 15%; and Wells Fargo & Co. (WFC), 14%. Each of these also have buy ratings from Goldman.
Bank of America
Bank of America shares finally may be on track to reach prices last seen in October 2008. Analysts have been increasing their earnings estimates and price targets so far in 2018, with the consensus calling for EPS to rise by more than 40% for full year 2018, to $2.57. Goldman is even more bullish, projecting a 65% increase. Technical indicators, as well as options trading, also registering positive signals. (For more, see also: Bank of America May Rise to Highest Level in 10 Years.)
A leading custodian bank, State Street recently was mentioned by a team at Credit Suisse Group AG as meeting the sort of bargain-hunting criteria that master investor Warren Buffett reportedly uses as screening methods. Goldman projects EPS growth of 22% in 2018 and 13% in 2019, while the current consensus among analysts calls for growth rates of 21% and 10%, per Yahoo Finance, up significantly since Investopedia covered that Credit Suisse report. State Street currently has a forward P/E ratio of less than 12 times projected earnings, also per Yahoo Finance. (For more, see also: 5 Stock Picks That Would Attract Warren Buffett.)