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Investing in the Financials Sector. My Thoughts And Picks.

The following is a guest post by Patty Moore of Working Mother Life. Show her some love with some traffic to her blog.


By Patty Moore

The financials sector includes a wide range of organizations, including:

  • Asset management companies
  • Banks
  • Consumer finance
  • Custody banks
  • Finance exchanges
  • Insurance
  • Investment banking and brokerage
  • Mortgage finance companies
  • Mortgage REITs
  • Thrifts

As of August 22, 2017, the Dow Jones U.S Financials Index has had a 12-month return of 19.93 percent. During the same period, the S&P 500 Index had a 12.35 percent return.

Outlook

The intermediate-term bullish case for the financials sector stems from several factors:

  • Rising yields: Unlike most other sectors, the financials do well when yields rise, which translates into higher income from interest. A forecast for higher interest rates is therefore bullish for the sector, which bodes well for the sector in the intermediate term. The Federal Reserve is expected to continue boosting interest rates, albeit at a slower pace than previously thought.
  • Consumer spending: Another bullish factor is the continued strength of consumer spending that benefits consumer finance companies and mortgage lenders, among others.
  • GDP growth: The quickening rate of GDP growth increases the demand for commercial credit as businesses continue to launch and expand.
  • Deregulation: Finally, the Trump administration’s war on regulation will likely increase profits in the financials sector.

These factors suggest that now could be a good time to invest in this sector.

Nevertheless, investors must always pay attention to short term trends, which have been volatile as of late. Recently, yields have dipped and the yield curve has flattened, although long-term rates seem to be rebounding. A little patience is likely to be rewarded, due in part to continued economic growth and a tight job market. These are inflationary trends, which will inevitably steepen the yield curve, push up interest rates and expand sector profit margins.

Stocks to Consider

Lenders in both the personal and commercial markets should continue to benefit from the growing economy. Here is a summary of three leading companies.

LendingTree

LendingTree (TREE) operates in the online loan marketplace, including personal loans, mortgages and home equity loans, reverse mortgages, credit cards, business loans, auto loans, insurance and student loans. In addition to its wide range of offerings, LendingTree is well known for its online tools, services and tutorials, covering topics such as free credit reporting, credit repair, debt relief and home improvement. LendingTree acts as an agent that provides loan products from a large network of competing lenders. The online marketplace allows customers to shop for loans from home and to easily compare competing offers.

LendingTree’s trailing twelve month (TTM) results outpaced the average from the thrift & mortgage finance sector. TREE had TTM earnings per share of $2.36, versus the industry average of $1.25. Its stock price rose more than 120 percent over the prior 52 weeks. The stock merits attention due to the company’s strong return on capital and robust profit trend. LendingTree has a high price/earnings ratio that is about four times higher than the industry average. Temporary price weakness would allow investors to purchase TREE shares at a lower P/E ratio.

LendingTree appears well-positioned to continue profiting from the high demand for credit, especially for home purchases. High rents and low inventory levels provide demand and supply factors that favor higher home prices and larger mortgages. The automobile industry is in bullish cycle, creating strong demand for car loans. Barring a sudden economic collapse, LendingTree stock offers investors a convenient way to diversify into several different financial markets.

LendingClub

LendingClub Corporation (LC) is an online peer-to-peer lender that allows investors to fund personal loans, small business loans, auto refinancing and medical patient financing. Personal loan proceeds up to $40,000 can be used for any purpose, such as credit card paydown, debt consolidation, home improvements or major expenses. LendingClub is on its way out of a multi-year period of bad press. The company’s CEO had been fired for fault loans, and its rankings slipped across the industry. But the dust has settled and the management team has been increasingly positive on the last two conference calls.

LendingClub stock gained more than 11 percent in the last 52 weeks. The company has a small EPS loss on a TTM basis. LC’s gross margins have beaten industry averages for the last five years. Its TTL gross margin is 97.5 percent versus 76.6 percent for the industry. The high gross margin is a reason to buy shares in LendingClub despite its negative EPS number. In terms of timing, its forward-looking P/E ratio of 36.0 is at a 52 percent discount to its five-year average of 75.5. LC is a relatively volatile stock with a beta of 1.79 compared to the S&P 500, making it appropriate for aggressive investors.

SLM Corp

Sallie Mae was a government-supported agency that split into two for-profit corporations in 2014. SLM Corp (SLM), one of the spinoffs, is a provider of private student loans. It also offers savings products, such as CDs, money market accounts and high-yield savings accounts. SLM TTM EPS is $0.62, compared to a consumer finance industry average of $4.81. Its TTM EPS growth is 12.73 percent versus -4.64 percent for the industry. The stock price climbed more than 41 percent over the last 52 weeks.

SLM has an exceptionally strong TTM profit margin of 43.51 percent versus the industry average of 32.62 percent. It also has an excellent return on sales (20.93 percent vs 13.57 percent). SLM offers competitive private student loans for those who cannot access federal loans. Continued economic growth and the growing wage gap between college graduates and those who never graduated college bodes well for student loan demand, and SLM should continue to earn its share. Stock ownership gives investor exposure to this important financial market.

{ 4 comments… add one }
  • Seb Loeb September 22, 2017, 6:45 am

    VR, how do you feel about a finance sector ETF to spread risk/gain across multiple companies?

    • The Lizard King September 22, 2017, 1:38 pm

      For the most part, I limit myself to individual stocks because they sport fatter options premiums than vehicles that include a basket of stocks. I’ve been known to make exceptions (AMZA) but don’t know of any financials ETFs that I like.

  • Chris B September 22, 2017, 5:46 pm

    Word on the street is that investors in P2P loans are seeing rapidly diminishing returns. A lot of these loans might be fraudulent, as the websites don’t do the dilligence a bank does. Before investing, I might see how hard it is to falsify info.

    https://forum.mrmoneymustache.com/investor-alley/lending-club-time-to-panic/

    I bought a few Navient bonds last year (similar to Sallie Mae). I figured the difficulty of getting out of a student loan through bankruptcy, etc. made it worth a shot. They were yielding something like 7-8% but I was early to the party and now I’m sitting on a small capital loss that is mostly offset by distributions. Breaking even hurts when the stock market rises like it has, but with stock valuations where they are, it’s tempting to top up on bonds yielding double my safe withdraw rate for retirement. I must remember bonds are bubbling hot too.

  • Rethink Retired September 23, 2017, 9:50 pm

    LC has been on my radar recently as well. It was all the rage leading up to the IPO and if it’s around in 10 years I imagine the stock would be a lot higher.

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