Bank of America is Wells Fargo’s top pick among the large U.S. banks.
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One couldn’t blame investors in the financial sector for feeling discouraged this year.
Going into 2022, they had big hopes for banks and other financials. It was expected that deal making and trading would slow from 2021’s torrid pace but that loan growth—and a helpful hand from the Federal Reserve lifting interest rates—would more than offset that downturn.
But this year appears to have brought even more economic uncertainty than when the economy was largely shut down at the onset of the pandemic in early 2020.
Instead of rising rates helping to widen margins at lenders, Wall Street now fears that rates will rise too quickly and tip the economy into a recession. And instead of stocks climbing this year, the SPDR Financial Select Sector Fund (ticker: XLF) is down 10.5%, faring slightly better than the S&P 500, which is down 14%.
But despite a less-than-rosy outlook for the sector, analysts at Wells Fargo (WFC) recently uncovered some opportunities.
“Our mantra in the current environment is to buy stocks—not the stock market— as the YTD selloff has created alpha (stock selection) opportunities,” Chris Harvey, equity strategist as Wells Fargo, wrote Wednesday.
He and his team identified five companies in the financials arena that are trading at attractive price-to-earnings multiples. The stocks are poised to outperform peers as his team expects that worries over the health of the consumer are “greatly exaggerated.”
Bank of America (BAC) is Wells Fargo’s top pick among the large U.S. banks. Shares trade at 10.4 times forward earnings, below the stock’s five-year high of 16 times earnings. Analysts expect that shares could trade at $66 apiece, which would be 16 times projected 2023 earnings.
Of the big banks, Bank of America is the best positioned to benefit from rising rates, even amid times of economic uncertainty. The Wells Fargo team was also encouraged to see loan growth accelerating at the bank even as rates rise.
For mid-cap banks, the Wells Fargo team likes New York-based Signature Bank (SBNY). Shares are down by more than a third this year, due in part to the bank’s exposure to the volatile crypto industry. But that volatility may actually lead to more volume being directed to Signature Bank, analysts wrote.
Shares trade at 7.3 times projected 2023 earnings, providing an attractive entry point for new investors, especially as the bank begins to realize the benefits of its West Coast expansion. Analysts have a $408 price target—nearly double recent trading levels.
In the insurance arena, Arch Capital (ACGL) is favored by Wells Fargo. Despite a challenging environment, the Bermuda-based insurer has seen top-line growth in its insurance and reinsurance businesses.
Analysts expect that Arch will see margin improvement in its property and casualty business while credit quality in its mortgage insurance business appears strong. There are also potential catalysts to boost shares this year: Arch has roughly $665 million in reserves for its mortgage book—more than double prepandemic levels, implying there is the potential for those reserves to be released into earnings. Also, Arch has been repurchasing shares.
American Express (AXP) tops the analyst picks in specialty finance as the team believes shares have underperformed due to recession worries. The stock trades at 14 times 2023 earnings but analysts feel that a price-to-earnings ratio of 18 times earnings is warranted. The team expects Amex to lift 2022 guidance and report better-than-expected data on travel and entertainment spending.
Among asset managers, the Wells Fargo team is most bullish on Apollo Global Management (APO). Shares are down 20% and trading at nine times projected 2023 earnings. But the analysts expect shares could trade at $73 apiece, which would imply that Apollo’s fee-related business would trade at 15 times projected earnings while its Athene insurance subsidiary would trade at eight times earnings.
Write to Carleton English at [email protected]
