Financial services companies are going to do well going forward with the expansion in the economy. This wealth-management company will do very well considering that with increased incomes that Americans are seeing they will want to invest more and more going forward.
I am very bullish on the U.S. economy. It has been expanding over the past several quarters. Employment is up. The Federal Reserve Chairwoman, Janet Yellen, has even declared that the economy has gone beyond full employment; the Fed has been pushing up interest rates. Incomes are increasing. Prices are moving upward nearing target levels.
Financial stocks will do well in an environment like such as that. Banks have more room to work with from a wider interest rate differential. That is what gets me excited about the financial sector. But, what about brokerages and wealth-management? How would they fare in an economic landscape as this? Quite well, as it turns out.
The incomes that I mentioned before that are going up will mean more spending. That means companies will do well. That, in turn, means the stock market will move higher. We have seen this over the past several months as the Dow has hit many records towards the close of the past year. And, a company such as a wealth-management firm will do very well with those kinds of opportunities.
Here are the net profits and earnings per share over the past several years:
2011: -93.3 -$0.90
2012: 51.1 $0.51
2013: 165.5 $1.72
2014: 180.8 $1.87
2015: 188.2 $1.89
These are solid net profits and solid earnings-per-share. But, what I really like is that the year 2016 is looking to come in well above the 1.89 eps from 2015, and crest above the $2.10 per share. And, yet, the stock is trading at $22. That means that you can buy this company at 10-times earnings. these kinds of bargains are hard to find on a regular basis. So, when you do find them you need to take advantage of them.
The reason this stock is down as much as it is is simply that the financial stocks were so heavily beaten down during the financial crisis. Since then, large numbers of investors have not found the courage to buy into this kinds of companies. This presents a great opportunity. Our financial stocks were hit very hard several years ago. And, now that the economy is turning, these same stocks have been lagging the overall market. The current EPS is sitting above 25. The average over the past 50 years is 15. this goes to show how undervalued the financial stocks are. And yet, financial stocks may have the biggest opportunity at advancing in the coming years.
While it may be some time before investors find favor again with financial stocks, it is important to look at your overall risk with this company. Assuming that in an expansionary economic landscape that this company merely maintains its current earnings and revenue, then you are buying this stock at 10-times earnings. That means you are picking up this earning potential with the opportunity to earn 10% on your money. That is a fairly low risk. considering the alternative, the yield on the 10-year government bond is still below 3%. Your earnings from this far exceed the return on government debt.
It will be a little bit of time before the financial sector catches up to the EPS ratio of the rest of the general market. But, eventually, it will happen. Then, once that happens, you are very likely to see a 50% increase in the value of this stock merely because of the stock catching up to the average of the market. Plus, any future earnings increases will be reflected in the stock price.
I do not see many downside risks to picking up these stocks. These are the kinds of equities I seek out regularly, stocks that have fallen out of favor years ago. This company would be an excellent addition to your portfolio.