A rise in the U.S. 10-Year Treasury Yield has re-emerged, but the market seems unscathed, with the S&P 500 reaching new record highs. The 10-year’s on the rise for reasons such as non-core inflation volatility, the infrastructure bill’s inflation prospect, and vaccine-related wobbles as the new delta variant caused doubt over the jobs market’s stability. And what should you buy when the 10-year is rising? Let’s start with financial stocks.
There’s been a close correlation between financial stocks and the U.S. 10-year yield over the past decade. Basic intuition would say that it could be because of the inverse reliance on banking loans/investment funds to the bond market for capital raising.
Still, I’d say that the analogy should be interpreted from a quantitative vantage point.
For today’s gallery, I’ve looked at which stocks are set for pent-up demand in both traditional finance and modern finance, which includes blockchain technology.
Here are my seven picks.
- BlackRock (NYSE:BLK)
- Cowen (NASDAQ:COWN)
- Citigroup (NYSE:C)
- JPMorgan & Chase (NYSE:JPM)
- Bank of America (NYSE:BAC)
- PayPal (NASDAQ:PYPL)
- Square (NYSE:SQ)
Financial Stocks: BlackRock (BLK)
BlackRock saw its “buy” rating maintained by Deutsche Bank in July. The fund has thrived financially, as its trading securities performed well during 2020 and into 2021.
Furthermore, the company’s real estate investment trusts (REITs), exchange-traded funds (ETFs) and iShares have caused much optimism surrounding a better revenue mix moving forward. BlackRock poses a possible 20% return over the next 12 months as its growing asset base and its share buyback program have increased its intrinsic value beyond the current market price.
BlackRock has also hiked its dividend from $3.63 a share to $4.13 per share in 2021, subsequently raising optimism of further profitability.
When I hear the word Cowen, the first thing that comes to mind is the modernization of investment banking. This company has been around for over 100 years, with locations across the world.
Cowen’s transactional flow is high, and it serves newer-age industries — namely cannabis, crypto, and mid-market SPACs (special purpose acquisition companies). The company beat its revenue expectations for the eleventh consecutive quarter.
The company’s earnings report showed an earnings per share beat of 10 cents and a revenue beat of $35.91 million.
Wall Street remains bullish on the stock’s prospects, with JMP Securities setting a price target earlier this year of $62 while maintaining a “market outperform” rating.
Financial Stocks: CitiGroup (C)
There has been much ambiguity about Citi. On numerous occasions, the stock has traded below its intrinsic value, and just hasn’t really lived up to its potential lately. Jane Fraser has joined the company as the bank’s new CEO, and restructuring is a priority for both her and the board.
Significant changes have been made to the Wealth Management unit this year, which has created much optimism. Citigroup also has a remarkable history of beating earnings — in fact, it earned another beat last month, as earnings per share came in 95 cents above expectations and a revenue beat of $273.99 million.
Citi stock is highly rated on Wall Street, with Oppenheimer recently reiterating its “outperform” rating and increasing its price target to $114. I believe Citi is one of the top financial stocks to buy if you’re using the bond market’s current sentiment as an indicator.
JPMorgan & Chase (JPM)
JPMorgan stock has underperformed the industry over the past year, but I believe it’s time to shine as recent strategic buyouts and increasing loan demand could start paying off. JPMorgan’s working on acquiring the industry’s best deposit franchise while also strengthening its loan portfolio. And the company recently added OpenInvest to its holdings. OpenInvest’s Co-founder and Chief Strategy Officer Joshua Levin said, “Our partnership with J.P. Morgan combines leading ESG technologies with America’s largest bank and the ability to reach nearly half of all American households.”
The firm’s second-quarter earnings report beat expectations with an earnings per share beat of 61 cents and a revenue beat of $762.45 million.
Goldman Sachs thinks the stock could reach the $184 level. With a price/earnings ratio of 10.38 trading below its five-year average of 13.42, you’d have to say the stock’s primed for a good run.
And a dividend yield of 2.3% is a nice add-on if you’re a dividend investor.
Financial Stocks: Bank of America (BAC)
Bank of America has done well to combat subdued loan demand by pivoting with an improvement in transactional flow and profiting from previous buyouts. Enhancing digital offerings, opening additional branches, and cost management should ascertain the Bank’s impressive financial performance.
The bank missed its revenue target by $330.18 million at the start of the month, but the market shrugged it off as its stock price still managed to surge over 5% ever since, adding to its near 60% gain over the past year.
The stock’s price to cash flow ratio of 9.36 shows good value relative to its five-year average of 11.57. Oppenheimer rates the stock a “buy” with a $48 price target. Any upside of this sort accompanied by its dividend yield of 2% makes it a sound investment even if one had to disregard the market factor tailwinds.
Although a technology company, PayPal is first and foremost a transactions company in my mind. And the growing correlation with financial stocks is there for all to see.
A staggering increase in customer accounts resulted in a 24.08% year-over-year increase in revenue. Furthermore, improved user engagement, partnerships with merchant services, peer-to-peer checkout momentum, and increased velocity have all contributed to the 44.64% year-over-year increase in operating profit margins.
Wall Street is extremely bullish on the stock, with Barclays recently setting a $350 price target while maintaining its “overweight” rating.
I believe that the PEG ratio tells us a lot, a PEG ratio of 0.74 is below the value threshold of 1 and implies that the stock price is currently trailing the company’s growth rate.
Financial Stocks: Square (SQ)
This pick is perhaps a spanner in the works but I wanted to include Square stock as I believe it’s a direct beneficiary of the financial sector’s success. The stock isn’t listed on the S&P 500 but it’s larger than a few of the index’s oldest components.
Source: Market Radar on Bloomberg
Jack Dorsey is on a mission to take over the modern financial world. The $29 billion acquisition of Afterpay — an app that allows people to pay in installments — signals the intent of the company’s management to acquire vertically, which will add tremendous worth to Square’s balance sheet and could subsequently increase shareholder value.
Barclays recently reiterated a “buy” rating on Square stock with a price target of $346.
The assets mentioned in this article are all excellent long-term buys, but I firmly believe that market factors could provide systemic support to the stocks over the next six months. If you’re building a portfolio of financial sector stocks, it would be wise to include a blend of big banking, investment, and fintech stocks. If there are any questions about the article, then don’t hesitate to contact me directly.
On the date of publication, Steve Booyens did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.