Stock selection is critical in the financial sector.
Rising interest rates are generally good news for bank stocks, helping to expand their net interest margins. Higher interest rates can also boost insurance companies’ profits on the safe debt they hold. While interest rates are expected to rise significantly in 2022, most financial stocks have struggled so far this year. Investors are becoming increasingly concerned that the Federal Reserve will be unable to bring down inflation without triggering a U.S. recession, which is bad news for bank loan growth and most of the financial sector. Despite the challenging environment, CFRA analysts see significant upside for these financial stocks.
Bank of America Corp. (ticker: BAC)
Bank of America is one of the largest diversified U.S. banks and financial holding companies. Analyst Kenneth Leon says Bank of America is relatively well positioned to benefit from rising interest rates, and nearly 90% of the bank’s rate sensitivity is tied to short rates. While the U.S. economic outlook remains uncertain, Leon is still projecting sequential loan volume growth for Bank of America in each quarter of 2022 in its consumer, commercial and industrial units. Leon projects at least 5% revenue growth this year. CFRA has a “buy” rating and $47 price target for BAC stock, which closed at $36.19 on June 3.
Morgan Stanley (MS)
Morgan Stanley is one of the largest U.S. investment banks. Leon says Morgan Stanley has reported consistent recurring revenues and cash flow, even in a difficult environment. Given the company’s position as a leading wealth and investment management business, Leon says the stock’s discounted valuation relative to the S&P 500 is not justified. Morgan Stanley currently trades at just 10.2 times forward earnings estimates, making the stock an attractive value, and Leon says it will benefit from elevated equity trading volumes and financial market volatility. CFRA has a “buy” rating and $100 price target for MS stock, which closed at $84.12 on June 3.
Charles Schwab Corp. (SCHW)
Charles Schwab serves as a securities brokerage and provides wealth management, banking, custody and other investment services. Analyst Michael Elliott says that Schwab shares have an attractive valuation and that the company is well positioned to benefit from rising interest rates. In fact, Elliott projects Charles Schwab can raise its net interest margins to near pre-pandemic levels by the end of 2022. Net interest revenues currently account for just 46.7% of total net revenues, down from around 60% before the March 2020 interest rate cuts. CFRA has a “strong buy” rating and $89 price target for SCHW stock, which closed at $70.07 on June 3.
American Express Co. (AXP)
American Express is a financial services company that specializes in credit cards, digital payments and travel services. Analyst Alexander Yokum says American Express is the “best of breed” among credit card stocks and should capitalize on strong card spending trends and bullish momentum in new card acquisitions. Yokum is expecting a significant rebound in travel and entertainment spending in 2022 and 2023, particularly among large corporations. In addition, he says American Express has superior credit-risk quality that protects investors in the event of an economic downturn. CFRA has a “buy” rating and $210 price target for AXP stock, which closed at $166.83 on June 3.
S&P Global Inc. (SPGI)
S&P Global provides credit ratings services and data analytics. It also operates S&P Dow Jones, which manages the S&P 500, the Dow Jones Industrial Average and other popular benchmark indexes. Yokum says investors don’t seem to appreciate the diversity and stability of S&P’s business following its acquisition of IHS Markit. Yokum says the rating business will face headwinds in 2022. However, he anticipates the ratings segment now accounts for only about a third of total revenue, down from about half before the IHS merger. CFRA has a “buy” rating and $410 price target for SPGI stock, which closed at $335.93 on June 3.
Goldman Sachs Group Inc. (GS)
Goldman Sachs is one of the world’s largest investment banks. Leon says Goldman is a top performer among its peers and is gaining market share in both banking and trading. He says Goldman’s consumer and wealth management business is seeing organic revenue growth and helped the bank generate 15% return on equity and 15.8% return on tangible equity in the first quarter of 2022, even after factoring in $300 million in net losses from the Ukraine war. In addition, Leon says Goldman’s U.S. credit risk remains solid. CFRA has a “strong buy” rating and $413 price target for GS stock, which closed at $318.68 on June 3.
Citigroup Inc. (C)
Citigroup is a global diversified bank and financial services provider. Leon says Citigroup investors should remain patient with the company’s transformation plan after years of underperformance on Wall Street. He says new CEO Jane Fraser is pursuing the correct strategy by exiting the bank’s Mexico business and selling retail banking assets in the Asia Pacific region. Leon says the equity capital released by these asset dispositions can be redeployed to the bank’s more efficient businesses, such as corporate treasury services and global wealth management. CFRA has a “buy” rating and $62 price target for C stock, which closed at $51.33 on June 3.
BlackRock Inc. (BLK)
BlackRock is the largest U.S. asset manager and one of the world’s top investment management companies. Analyst Catherine Seifert says BlackRock is the market leader in passive investments, and strong fund performance will attract investors and gain BlackRock additional market share in the next several years. Seifert says equity and fixed income exchange-traded funds and alternative style funds also have attractive growth potential in the long term. BlackRock’s Aladdin risk management software also helps differentiate the company from other asset manager stocks. CFRA has a “strong buy” rating and $900 price target for BLK stock, which closed at $671.74 on June 3.
8 financial stocks to buy as interest rates rise:
— Bank of America Corp. (BAC)
— Morgan Stanley (MS)
— Charles Schwab Corp. (SCHW)
— American Express Co. (AXP)
— S&P Global Inc. (SPGI)
— Goldman Sachs Group Inc. (GS)
— Citigroup Inc. (C)
— BlackRock Inc. (BLK)
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Update 06/06/22: This story was published at an earlier date and has been updated with new information.