As we have noted on multiple occasions, one of the few sectors in which companies applaud higher interest rates is the financials. When interest rates are higher, banks make more money by taking advantage of the difference between the interest banks pay to customers and the interest the bank can earn by investing deposits and writing loans.
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The stock market was on pins and needles recently as interest rates surged higher in October but have retreated some, and while a huge increase would be dangerous for some sectors, the reality is the Federal Reserve probably will not raise interest rates for another year or even two. Plus, with the benchmark 10-year Treasury trading up to a 1.55% handle, and the 30-year long bond at 1.96%, it is nothing compared to the 5% yields both had in the summer of 2007.

The bottom line for investors is it is likely the top large-cap financials will continue to post some very solid numbers like the ones we saw recently. So we screened our 24/7 Wall Street research database looking for stocks of banks, and top brokerage firms redesigned as banks, that are rated Buy. While five look very attractive, it is still important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Bank of America

The company posted very solid third-quarter results and looks poised to do the same for the fourth quarter. Bank of America Corp. (NYSE: BAC) is a ubiquitous presence in the United States, providing various banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, corporations and governments in the United States and internationally. It operates 5,100 banking centers, 16,300 ATMs, call centers and online and mobile banking platforms.

The bank has expanded into a number of new U.S. markets, with scale across the country positioning it ideally to benefit from accelerating loan growth over the next two years. Moreover, unlike smaller peers, scale allows the bank to increase investment substantially over the next few years without notably jeopardizing returns, driving further market share gains.

Bank of America stock investors receive a 1.75% dividend. Wells Fargo has a $60 price target, and the analysts’ consensus target is $47.18. Tuesday’s closing print was $47.88.

This top bank stock backed up some recently and is offering an outstanding entry point. Citigroup Inc. (NYSE: C) is a leading global diversified financial service company that provides consumers, corporations, governments a broad range of financial products and services.
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Citigroup offers services such as consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. It operates and does business in more than 160 countries and jurisdictions in North America, Latin America, Asia and elsewhere.

Trading at a still very cheap 9.9 times estimated 2021 earnings, this pick looks very reasonable in what remains a volatile stock market and in a sector that has dramatically lagged.

Investors receive a 2.97% dividend. The Morgan Stanley price target on Citigroup stock is $91, while the consensus target is $84.75. The last trade for Tuesday was posted at $68.60 a share.

Goldman Sachs

This financial services giant is a premier stock for those looking to add financials. 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, and the firm continues to be a dominant force around the world in the world of finance.

Its Investment Banking segment provides financial advisory services, including strategic advisory assignments related to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs; middle-market lending, relationship lending and acquisition financing; as well as transaction banking services.

This segment also offers underwriting services, such as equity underwriting for common and preferred stock and convertible and exchangeable securities, and debt underwriting for various types of debt instruments, including investment-grade and high-yield debt, bank and bridge loans and emerging- and growth-market debt.

Goldman Sachs Global Markets segment is involved in client execution activities for cash and derivative instruments; credit products; mortgages; currencies; commodities; and equities; and provision of equity intermediation and equity financing services. It also offers clearing, settlement and custody services.

Shareholders receive a 1.89% dividend. The $490 price target at BofA Securities is higher than the $451.41 consensus target for Goldman Sachs stock. The shares closed on Tuesday at $423.85.

This stock trades at a still reasonable 12.0 times estimated 2021 earnings. JPMorgan Chase & Co. (NYSE: JPM) is one of the leading global financial services firms and one of the largest banking institutions in the United States, with about $2.6 trillion in assets. The company as it is today was formed through the merger of retail bank Chase Manhattan and investment bank J.P. Morgan.
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The firm has many operating divisions, including investment and corporate banking, asset management, retail financial services, commercial banking, credit cards and financial transaction services.

Top analysts are very positive on JPMorgan, largely because the industry titan faces a continued broad recovery in nearly every aspect of its business. It has a leading M&A advisory and capital markets product set and market share. It has a massive footprint of corporate and commercial banking customers. And it has a sizable wholesale payments businesses. The bank has proven that it has the wherewithal to invest continually in people, products, and platforms to further its market share base, extending its competitive advantage versus most peers.

The dividend yield is 2.35%. Wells Fargo’s $210 price objective is a Wall Street high. The consensus price target is $173.86, and JPMorgan Chase stock closed at $170.47 on Tuesday.

Morgan Stanley

This is another of Wall Street’s white-glove firms, and it may be among the best buys among the banking and investment stocks. Morgan Stanley (NYSE: MS) is a global investment bank with leading positions in investment banking (M&A and equity underwriting), equity trading and wealth management, which contributes nearly 50% of firmwide revenues. The firm also has an asset management business, which adds to the lower-risk business profile the firm has pursued since the financial crisis.

Last year, this Wall Street investment bank agreed on a $13 billion purchase of discount brokerage E-Trade. With 5.2 million customers, it was once a revolutionary platform that “helped usher in a dramatic shift among financial services firms” and fueled the rise of indexes and exchange-traded funds, making investing vastly easier for do-it-yourself investors.

Investors are paid a 2.68% dividend. Jefferies has set a $121 price target for Morgan Stanley stock. The median price target is $113, and shares closed Tuesday’s trading at $104.66.

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It’s always a bit safer to buy shares after the numbers have been posted, and the home run results for the sector this past quarter show that strong momentum should remain a tailwind. So will interest rates that are creeping higher. These five stocks have all done extremely well, so it may make sense to scale in capital and buy partial positions now and see if we don’t get a correction in the fourth quarter to add more shares.

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