Banks have been one of the best-performing areas of the market for the past year or so, and many look like they've gotten a little too expensive. However, there are some that still look like excellent long-term investments. Here's why our contributors think that Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and JPMorgan Chase (NYSE:JPM) could be smart buys right now.
Don't bet against Goldman
Dan Caplinger (Goldman Sachs): Investors watching the financial sector during the current earnings season have largely focused their attention on retail banks, which have seen some stellar performances from the improving interest rate environment and solid deposit growth. By contrast, Goldman Sachs has some investors worried about its prospects, especially given terrible figures from the investment banking giant's trading activity. Long known for its leadership on Wall Street, Goldman wasn't even able to match what its peers posted, losing half of its revenue from the fixed-income trading segment alone.
Yet buying after bad news can be smart, and Goldman still has a lot going for it. Its consumer-facing Marcus unit has gotten off to a good start, and its core investment banking business has done well in advising clients about strategic alternatives and potential mergers and acquisitions. Consolidation activity is only building throughout most of the market, and that should give Goldman even more opportunities for growth from mergers and acquisitions and other investment banking activity. Moreover, despite its challenges in some parts of its business, Goldman has sustained enviable levels of revenue and earnings growth. Combine those favorable possibilities with a share price that has fallen slightly after its quarterly report, and you have a recipe for a good entry point in one of the most successful financial institutions in U.S. history.
Not all banks are expensive now
Matt Frankel (Morgan Stanley): To be clear, I'm a fan of both major investment banks as long-term investments and Dan makes some great points about Goldman Sachs. However, Morgan Stanley's recent results simply look more promising.
For one thing, Morgan Stanley's trading revenue has suffered less than Goldman's. Fixed-income, currency, and commodities trading revenue fell by 46% as compared with Goldman's 50%, and equities trading revenue dropped by just 5% year over year, which was significantly better than analysts were expecting.
While trading is suffering industrywide, wealth management businesses are looking strong, and Morgan Stanley's is no exception. Not only did its wealth management revenue jump by more than 10% year over year, but the company saw positive inflows of $21 billion, meaning that more new money is being deposited than withdrawn. In contrast, Goldman's wealth management division, while performing well, actually saw a small net outflow for the quarter.
In short, aside from trading, Morgan Stanley's business is doing great. And with a 30.8% effective tax rate (excluding the one-time tax reform provision), the company could get a big boost from the new 21% corporate tax rate. At just 15.4 times 2017's earnings and a low price-to-book multiple of 1.44, Morgan Stanley is one high-performing company that still looks cheap in this record-high stock market environment.
The best and biggest bank
Jordan Wathen (JPMorgan Chase): Shares of the nation's largest bank by assets are far from cheap, but it's my view that the company deserves a premium to the average bank stock. The stock trades for about 2.1 times tangible book value, even as returns on tangible common equity are likely to rise to 15% in 2018.
Though we may think of JPMorgan Chase as a massive global bank for large corporate borrowers (it is), its consumer and community bank has been a standout star. In the most recent quarter, the company revealed that average deposits grew 7% year over year in its unit focused on its smallest accounts. Credit cards have been a persistent winner in this category, with average loans rising more than 5% compared to the year-ago period. The company is digging its claws into the business of payments processing, as merchant processing volume grew at a 12.8% clip thanks to ChaseNet, a partnership with Visa.
JPMorgan Chase's investment bank was the laggard in the fourth quarter, thanks to a large credit loss due to a soured margin loan and a general decline in fixed-income trading revenue, an ongoing phenomenon across Wall Street. Despite these headwinds, the bank can lay claim to the No. 1 spot in global investment banking fees in 2017. Diversity means that when one unit zigs, others are likely to zag, and JPMorgan's diversity is one of many reasons I like it as a bank stock for 2018 and beyond.
Dan Caplinger has no position in any of the stocks mentioned. Jordan Wathen has no position in any of the stocks mentioned. Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Visa. The Motley Fool has a disclosure policy.