[cnxvideo id=”625470″ placement=”ros”]It sure doesn’t take much to turn the tide these days, especially when it comes to interest rates. As little as six weeks ago, Wall Street was handicapping basically a zero chance that the Federal Reserve would be raising rates. After the Fed minutes were released this week, the market reversed, and now it looks like a June increase in the federal funds rate is clearly on the table.
One sector that will benefit from an increase in rates is the financials, which have lagged the overall market this year. While some favor the regional banks as a way to play the rate increase, for many investors concerned about market volatility, the best way is to go with the large cap blue chips. We screened the Merrill Lynch research database and found four companies rated Buy that make sense now.
Citigroup
This top bank is still down over 20% from highs that were posted last summer. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.
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Trading at a very cheap 9.7 times estimated 2016 earnings, this company looks very reasonable in what is becoming a pricey stock market. While the Merrill Lynch team did lower estimates for the bank back in April, citing a drop off in investment banking revenue, the company reported solid first-quarter earnings and seems to have a good hold on expenses. A continued stock buyback program is also a positive.
Citigroup investors are paid a tiny 0.45% dividend. The Merrill Lynch price target for the stock is $59, and the Thomson/First Call consensus target is $56.42. Shares closed most recently at $45.06.
Goldman Sachs
This company continues to be the gold standard of Wall Street banks and trades at a low 11.2 times estimated 2016 earnings. Goldman Sachs Group Inc. (NYSE: GS) has a gigantic institutional equity, debt and derivatives business, an ultra high net worth clientele, top investment banking and capital markets expertise. The bank continues to be a dominant force around the world and is one of the most sought after in the world. And it is one of the very few that dictate who can be a client at the firm.
In investment banking, the company has the preeminent client franchise. Goldman Sachs advised on more than $1.5 trillion of announced mergers and acquisitions transactions last year, the highest level the bank has ever recorded. It also has maintained a leading market share over the past 25 years. It maintained a market position when merger and acquisition activity was dominated by technology in 1999, by financials in 2008 and by natural resources in 2014. The bottom line is, regardless of where market strength is in any given year, Goldman Sachs is up to the task.
Goldman Sachs shareholders are paid a 1.68% dividend. Merrill Lynch has a $185 price target, while the consensus price target for the stock is $189.39. The stock closed Thursday at $154.70.
JPMorgan
This stock trades at a very low 10.9 times estimated 2016 forward earnings. JPMorgan Chase & Co. (NYSE: JPM) is expected to benefit from commercial loan growth and an upturn in capital spending. Wall Street analysts agree that the stock seems attractively valued on estimated price-to-earnings and a very solid price-to-book value. Some on Wall Street have cautioned that last year’s divestiture of the physical commodities business could provide an earnings headwind throughout this year.
Improvement in loan growth, slow but improving equity capital markets, and a steady increase in deposits will be a solid plus. Trading at a discount to many of the large cap banks on 2016 earnings estimates helps upside potential as well. With $2.6 trillion in assets on a worldwide basis, and one of Wall Street’s savviest leaders in Jamie Dimon, the stock is a solid buy for investors.
Dimon also recently put his money where his mouth was and was reported to have bought a stunning 500,000 shares of the stock for a massive $26 million. It brings his total holdings in the bank to 6.7 million shares, worth over $360 million.
JPMorgan investors are paid a solid 3.03% dividend. The $72 Merrill Lynch price target is higher than the consensus price target of $70.78. The shares closed Thursday at $63.39.
Wells Fargo
This is another stock for investors to look at now for safety, dividends and solid upside potential. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the Internet and mobile banking. It also has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.
Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue. The stock also remains a top Warren Buffett holding. In fact, Buffett recently raised his holdings in the bank to 10% on the stock’s weakness.
Wells Fargo shareholders are paid a solid 3.14% dividend. The Merrill Lynch price target is posted at $57, and the consensus is at $55.03. Shares closed Thursday at $48.38.
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These top bank stocks provide very solid total return potential. More conservative accounts looking to add new positions would be well served buying any of these for the rest of 2016 and beyond.
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