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

Financial stocks could be on the verge of higher returns. Rising inflation levels over the summer months convinced investors that the Federal Reserve would…

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This article was originally published by Investor Place

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)

Source: First Class Photography / Shutterstock.com

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)

Bank of America (BAC) logo on top of a retail office building.Source: 4kclips / Shutterstock.com

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)

Source: Shutterstock

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)

bank stocks A customer makes a transaction at a bankSource: Africa Studio / Shutterstock.com

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)

cash and a pen lay atop a paper with graphs and tablesSource: Shutterstock

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)

A sign for JP Morgan Chase & Co (JPM).Source: Bjorn Bakstad / Shutterstock.com

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)

Source: Casimiro PT / Shutterstock.com

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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Author: Tezcan Gecgil

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Economics

Cryptos Crash Despite Tesla Leaving Door Open To Accepting Payments

Cryptos Crash Despite Tesla Leaving Door Open To Accepting Payments

Cryptocurrency prices plunged overnight with the selling pressure climaxing…

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Cryptos Crash Despite Tesla Leaving Door Open To Accepting Payments

Cryptocurrency prices plunged overnight with the selling pressure climaxing around the opening of the European markets, closing of Asia.

This left Bitcoin back below $60,000 for the first time in 11 days…

Source: Bloomberg

And Ethereum dropped below $4,000

Source: Bloomberg

There was no obvious news-driven catalyst for the drop and many investors were actually buoyed the last few days after a filing with the SEC suggested Tesla had left the door open to accepting Bitcoin for its products in the future.

“During the nine months ended September 30, 2021, we purchased an aggregate of $1.50 billion in bitcoin. In addition, during the three months ended March 31, 2021, we accepted bitcoin as a payment for sales of certain of our products in specified regions, subject to applicable laws, and suspended this practice in May 2021,” the 10-Q document reads.

“We may in the future restart the practice of transacting in cryptocurrencies (‘digital assets’) for our products and services.”

Additionally, CoinTelegraph reports that PlanB, creator of the popular Bitcoin Stock-to-Flow (S2F) model, called Bitcoin’s price retracement from the $60,000-level the “2nd leg” of what appeared like a long-term bull market.

In doing so, the pseudonymous analyst cited S2F, which anticipates Bitcoin to continue its leg higher and reach $100,000 to $135,000 by the end of the year.

The price projection model insists that Bitcoin’s value will keep on growing until at least $288,000 per token due to the “halving,” an event that takes place every four years and reduces BTC’s issuance rate by half against its 21 million supply cap. 

Bitcoin after the 2012, 2016 and 2020 halving. Source: PlanB

Notably, Bitcoin has undergone three halvings so far: in 2012, 2016 and 2020.

Each event decreased the cryptocurrency’s new supply rate by 50%, which was followed by notable increases in BTC price. For instance, the first two halvings prompted BTC price to rise by over 10,000% and 2,960%, respectively.

The third halving caused the price to jump from $8,787 to as high as $66,999, a 667.50% increase. So far, S2F has been largely accurate in predicting Bitcoin’s price trajectory, as shown in the chart below, leaving bulls with higher hopes that Bitcoin’s post-halving rally will have its price cross the $100,000 mark.

Bitcoin S2F as of Oct. 26. Source: PlanB

PlanB noted earlier this year that Bitcoin will reach $98,000 by November and $135,000 by December, adding that the only thing that would stop the cryptocurrency from hitting a six-digit value is “a black swan event” that the market has not seen in the last decade.

Despite the high price projections, Bitcoin can still see big corrections in the future. PlanB thinks the next crash could wipe at least 80% off Bitcoin’s market capitalization, based on the same S2F model.

“Everybody hopes for the supercycle or the ‘hyperbitcoinization’ to start right now and that we do not have a big crash after next all-time highs,” the analyst told the Unchained podcast, adding.

“As much as I would hope that were true, that we don’t see that crash anymore, I think we will. […] I think we’ll be managed by greed right now and fear later on and see another minus 80% after we top out at a couple hundred thousand dollars.”

Tyler Durden
Wed, 10/27/2021 – 08:23

Author: Tyler Durden

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Economics

Tesla Won’t Be the Only Trillion-Dollar EV Stock

Two days ago, Tesla (NASDAQ:TSLA) did something unthinkable – something that only four tech stocks in the history of capitalism have ever accomplished.
It…

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Two days ago, Tesla (NASDAQ:TSLA) did something unthinkable – something that only four tech stocks in the history of capitalism have ever accomplished.

It became a trillion-dollar company.

It joined Alphabet (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT) as the only U.S. companies to currently hold that distinction. Not only that, but Tesla cleared the trillion-dollar mark faster than any other company.

Source: Morning Brew
Source: Morning Brew

To a lot of folks, all of this just sounds silly.

That’s because, at a $1 trillion valuation, Tesla is now worth more than Toyota, Volkswagen, Daimler, General Motors, BMW, Ford, Stellantis, Volvo, Ferrari, Honda, and Hyundai combined – and most of those companies sold way more cars and recorded way bigger revenues than Tesla did last year.

So… Tesla at a trillion bucks… that has to be a bubble, right?

Wrong.

Because, last I checked, companies aren’t valued on how many cars they sell or how much revenue they rake in – they’re valued on profits. After all, to shareholders, how valuable is the sale of a $40,000 car if the automaker spent $40,000 to make, advertise, and sell the car?

It’s not valuable at all.

That’s the piece that Tesla bears are missing. Profits – not sales – matter, and Tesla is structurally and significantly more profitable than legacy automakers.

Why?

Let’s zoom out here. The reality is that, at scale, making an electric vehicle (EV) will be significantly cheaper than making a gas-powered car.

I know. That’s contrary to everything you’ve ever been told. And before you go pull up statistics showing me that EVs are more expensive to make than gas-powered cars today, let me tell you that the current EV production premium is exclusively because of the battery.

The battery comprises about 25% of an EV’s production costs. Strip out the battery and it’s way cheaper to make an EV than a gas-powered car, because there are way less parts.

With EVs, there’s no oxygen sensors, no spark plugs, no motor oil, no timing belts, etc.

The fewer parts you have, the cheaper it is to make.

So, the only thing keeping EV production costs higher than gas-car production costs is the battery – and those costs are plummeting. Between 2007 and 2020, the cost of EV battery packs has registered an average decline of 16% per year.

The more time goes on, the more battery costs go down, and the cheaper and cheaper it gets to make an EV.

Soon enough, battery costs won’t be a hurdle anymore. By that point – likely within the next decade – EVs will be significantly cheaper to make than gas-powered cars.

Not to mention, consumer demand is shifting toward EVs, so today’s prospective car buyers are willing to pay a premium for an electric car. That should result in higher sales prices for EVs, and reduce marketing costs for EV makers. Notice how Tesla hasn’t had to materially discount its cars, or how the company never runs any ads yet everyone still wants one?

In financial terms, the implications here are obvious. Tesla should sell its cars at higher prices than traditional automakers, and operate at significantly higher gross margins, with lower marketing spend, resulting in significantly higher profits per car.

Let’s put some numbers to this…

The average car sells for about $40,000. Tesla’s average sales price last quarter was $50,000. Higher sales price? Check.

Automakers typically run at 15% gross margins. Tesla clocked in at 30% gross margins last quarter. Higher gross margins? Check.

Your average automaker spends about 7% of revenues on sales and marketing, and another 5% on research and development. Tesla’s marketing spend rate is currently about 7%, and rapidly falling with an opportunity to hit 5% or lower at scale, while the R&D rate is already closing in on 4%. Lower operating expense (opex) rates? Check.

Add it all up, and the average automaker is netting about $1,200 in operating profits per new car sold, while Tesla is making about $10,500 in operating profits per new car sold – a near 9X increase.

So… significantly higher profits per car? Double check.

And that, in a nutshell, is why Tesla deserves its trillion-dollar valuation.

Elon Musk & Co. make about 9X more per car than other automakers, so TSLA deserves to be valued at about 9X your biggest legacy automaker, assuming Tesla can one day sell as many cars as that automaker (which we think is doable).

The biggest legacy automaker? Toyota. Its market capitalization? $240 billion. A 9X multiple on that is a $2-plus TRILLION potential valuation for Tesla one day.

This run isn’t over…

More importantly, though, the above “back-of-the-napkin math” is why Tesla won’t be the only trillion-dollar electric vehicle company.

Because Tesla won’t be the only company in the EV universe to benefit from economies of scale, lower production costs, and lower marketing costs. In fact, almost all pure EV makers will benefit from those dynamics, which means they will make about 9X as much profit per car sold as their legacy automakers at scale.

Therefore, while the auto industry titans of today are worth anywhere between $50 billion and $250 billion, we think the EV industry titans of tomorrow will be worth 9X that – anywhere between $450 billion and $2 trillion.

So what does that mean for you as an investor today?

Well, most EV stocks not named Tesla are worth less than $20 billion today.

That’s why – while we’re still bullish on Tesla – we’re much more bullish on other EV stocks whose best days are still ahead of them… stocks that we feel have 10X, 20X, even 30X upside potential.

The million-dollar – er, trillion-dollar – question is: What are the names of those stocks?

That’s what we aim to uncover in our most exclusive investment research service, Early Stage Investor.

For readers who are unaware, Early Stage Investor is our small-cap investment advisory where we focus on investing in the world’s most innovative companies and game-changing technologies… while they’re still in their early stages… before they soar thousands of percent like Tesla.

Very recently, we just launched a brand-new portfolio in Early Stage Investor called the 4 EV Stocks for Financial Freedom portfolio – and in that portfolio are the names of four EV stocks that we feel are best positioned to follow in Tesla’s footsteps, turn into giants of the future EV industry, and ultimately score shareholders enormous profits.

The best part? All four of those stocks are tiny and off the radar of most investors, so getting in now is like getting in on Tesla back in 2015… before Elon Musk was a household name, and before TSLA stock turned early shareholders into “Teslanaires.”

These stocks could do the same.

The only question that remains: Will you be one of them?

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

The post Tesla Won’t Be the Only Trillion-Dollar EV Stock appeared first on InvestorPlace.


Author: Luke Lango

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Economics

Energy Continues To Lead US Equity Sectors By Wide Margin In 2021

The reboot of energy stocks rolls on in the year-to-date sector horse race, based on a set of ETFs through Tuesday’s close (Oct. 26). The rebound in…

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The reboot of energy stocks rolls on in the year-to-date sector horse race, based on a set of ETFs through Tuesday’s close (Oct. 26).

The rebound in the previously faltering energy sector began a month ago. In late-September, CapitalSpectator.com reported that Energy Select Sector SPDR Fund (XLE) regained the lead for the major equity sectors in 2021. That lead has subsequently strengthened through October.

XLE is up an astonishing 61.3% so far this year, or roughly twice the year-to-date gain in our previous report from a month ago. Lifting the fund is a combination of surging oil and gas prices, which in turn is driving bullish earnings expectations amid mounting evidence that higher inflation may persist for longer than previously expected.

Not surprisingly, current conditions have triggered a bullish attitude adjustment for the sector’s outlook, reports Barron’s:

About 80% of all analysts’ profit forecasts for this year and next have been increased, higher than the 74% seen in September, according to Citigroup. That means more profit projections have been increased than reduced in the past month.

The strength of energy’s year-to-date rally is no less conspicuous when you consider that the second-best sector performer this year is far behind. Financial Select Sector SPDR (XLF) is up 39.5% — a strong gain in absolute terms, but nowhere near XLE’s surge.

The US stock market overall is posting an impressive rise this year via SPDR S&P 500 (SPY). But the ETF’s 23.2% increase so far this year pales next to XLE’s advance.

The weakest sector performer this year: Consumer Staples SPDR (XLP), which is higher by a relatively moderate 7.9% year to date. The sector, traditionally considered one of the more resilient, defensive corners of the market, is struggling to keep pace with equities overall (SPY), as this chart of relative performance history shows:

When the line is rising, the broad US equity market (SPY) is outperforming XLP. ON that basis, XLP’s defensive features have remained out of favor for much of the time since the market began recovering from the coronavirus crash in the spring of 2020.


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