The financial sector has gained momentum this year. Banks, lenders, insurance companies, financial services companies and payment processing companies are struggling with inflation, rising interest rates and market volatility. These pressures have pushed some of the best financial stocks like bank of america (BAC 0.24%), blog (SQ -0.23%)i Blackstone Group (BX 0.22%) 27% or more at the time of writing, although each of these companies has tremendous long-term opportunities.
Here’s why September might be a good time to add these discounted stocks to your portfolio.
1. Bank of America
Benchmark interest rates have been at historically low levels for nearly 15 years. Thus, the recent rate hikes by the Federal Reserve have been welcomed by banking institutions such as Bank of America. These higher rates mean banks can earn more interest on the loans they make.
Bank of America’s second-quarter net interest income — its net income after financing its assets and securities — rose $2.2 billion, or 22 percent, from a year ago and a 7% compared to last quarter. It’s also about spending less and earning more. Its efficiency ratio, which measures how much Bank of America has to spend for every dollar of revenue, is down to 54%.
House price growth has also helped their average loan balance grow by 12%. Couple that with growing interest in those balances, and Bank of America has a clear path to growing its revenue. Rising interest rates should work in its favor next year, but that growth opportunity isn’t necessarily reflected in the bank’s share price.
Recession worries, as well as its lower-than-required year-end reserves, have made investors less enthusiastic about its future. A recession would certainly affect the number of loans it creates, and preserving capital to meet reserve requirements could hinder its revenue growth.
However, today’s price-to-earnings (P/E) ratio of 11 makes the stock a steal of a deal for long-term value investors, even with short-term headwinds that could face the bank. In addition, Bank of America stock pays dividends. At today’s share price, its yield is close to 2.5% and the bank’s payout ratio of just under 30% is conservative, meaning its payout should be sustainable going forward predictable
Shares in fintech firm Block have been absolutely hammered – down 74% over the past year. General market volatility and deteriorating economic conditions have weighed heavily on the credit and payment processing company. The more people use Block to buy goods or services, the higher the revenue. A recession could certainly reduce your transaction volume. But this setback would only be temporary.
Block has only reached about 3% market penetration, leaving it with plenty of room to expand. The company recently launched its Clearpay ‘buy now pay later’ program in the UK. It has also reported big gains recently. In the second quarter, its gross profit grew 29% year-on-year and increased 14% from the previous quarter. However, its EBITDA (earnings before interest, taxes, depreciation and amortization) is steadily declining, and it ultimately reported a net loss of $208 million in the second quarter, another reason for its price of shares discounted.
Overall, though, I think its long-term headwinds, including new products and strong user penetration, should allow it to grow in market share over the next decade, making today’s low price a great buying opportunity.
3. Black Stone
Financial stocks are not necessarily known for their very high dividend yields. In fact, some of them don’t pay dividends at all. But investment and asset management firm Blackstone is something of an outlier in this regard. Paying a dividend that (at the current share price) yields more than 5%, the company (including its subsidiaries such as the privately held Blackstone Real Estate Investment Trust) has grown tremendously over the past few years, making it one of the major current financial actions. .
Blackstone’s revenue is primarily fee-based income from investments it manages through its financial services arm. At the end of the second quarter, it had $914 billion in assets under management, making it one of the largest investment firms in the world. Its fee-related income grew by 54% over the past year, while its distributable income increased by 86%. Capital inflows from investors reached $88 billion in the second quarter, the second highest level in the company’s history.
Blackstone is putting that money to good use. It is rapidly expanding its portfolio, especially in the real estate space. In 2021, it branched out into the data center industry by acquiring QTS Realty Trust; is very active in the single-family and apartment rental business; it is currently in the process of acquisition American campus communities; and closed with the purchase of another REIT, PS Parks Business.
The share price is down 27% year-to-date and has an attractive P/E ratio of 17. Given its current growth opportunities and attractive dividend yield, Blackstone is an important value buy in the financial sector .
Bank of America is an advertising partner of The Ascent, a Motley Fool Company. Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Blackstone Inc. and Block, Inc. The Motley Fool has a disclosure policy.