The S&P 500 and Nasdaq indexes have never been higher, so it can seem increasingly difficult to find reasonably priced stocks. That said, there could still be some compelling bargains to be had in the banking sector. Here's why three of our Motley Fool contributors think American Express (NYSE:AXP), Bank of America (NYSE:BAC), and Wells Fargo (NYSE:WFC) are worth a look now.
A cheap play on the war on cash
Matt Frankel (American Express): Credit card giant American Express has done a great job of growing its business in recent years -- in fact, the company has replaced the lost income from its former Costco partnership and then some.
The company's revenue grew by 9% over the past year, with particularly strong 18% growth internationally. American Express cards are not widely used in most areas outside of the U.S., so this growth rate could conceivably continue for years to come.
Additionally, American Express is doing an excellent job of bringing millennials into its ecosystem, which is a massive potential growth driver over the coming decade as this large generation reaches its peak spending years. The company has been especially effective with higher-income millennials, with products such as the $550-annual-fee Platinum card with millennial-focused perks like free Uber rides.
Also, Amex is doing a great job of controlling expenses. Sure, some expenses have been higher, but for the right reasons. For example, the company's marketing and business development spending is up 14% over the past year, but this could pay off several times over given the company's success with its newer products. On the other hand, operating costs actually dropped by 2% year over year -- an impressive feat given the company's revenue growth.
At less than 14.5 times the midpoint of its 2018 earnings guidance, American Express is a well-run and growing way to play the war on cash that is valued cheaply.
A "prime" beneficiary of the rising rate environment
Sean Williams (Bank of America): Though it's far from the flashiest name in the banking industry, Bank of America looks to be in great shape to benefit from a strong U.S. economy and a rising rate environment.
The first thing to appreciate about Bank of America is that its bread-and-butter metrics are heading in the right direction. Within consumer banking, deposit and loan growth totaled 5% and 7%, respectively, during the second quarter from the year-ago period. Meanwhile, the company reported even stronger deposit growth from its global banking segment (8%). Traditional deposit and loan activity may not be exciting, but they represent the bare bones of what makes banks money. During the second quarter, Bank of America recorded a 33% increase in net income, despite just a 3% adjusted year-over-year increase in aggregate revenue.
Secondly, the rising interest rate environment is going to help out Bank of America more so than many of its peers. According to the company's 10-Q filing with the Securities and Exchange Commission, a parallel shift upward of 100 basis points in short- and long-term rates over the next 12 months would yield an extra $2.84 billion in net interest income. Because loan costs tend to be fixed, most of this added income goes right to Bank of America's bottom line. With the Federal Reserve firmly in a tightening stance as inflation rises, B of A stands to be a prime beneficiary (pun fully intended).
Investors also shouldn't discount the fact that Bank of America has put its litigation costs associated with the Great Recession in the rearview mirror, and its much-improved credit portfolio, along with its bolstered equity position, have afforded it the ability to reward longtime shareholders (like myself). Following its passage of the Fed's stress test, Bank of America was cleared to increase its quarterly dividend by 25% to $0.60, as well as repurchase a whopping $20.6 billion of its own stock. That should result in a higher yield and improved earnings per share.
While not at the steep discount it once was, Bank of America is still valued at less than 11 times forward earnings, which looks to be more than a reasonable deal with interest rates on the rise and the Tax Cuts and Jobs Act putting more cash back into B of A's pockets.
A well of profits
Jordan Wathen (Wells Fargo): A deluge of negative headlines, fines, legal expenses, and an overcapitalized balance sheet may not be the kinds of things associated with high-return banks. Yet, despite all these weaknesses, Wells Fargo's returns are still very impressive. It earned roughly 13% on tangible equity in the most recent quarter.
The problems at Wells Fargo are well known and well publicized. The Federal Reserve took the unusual step of capping its size at no more than $2 trillion in assets until regulators are pleased with its progress in curbing aggressive sales practices, among other issues.
It's my view that Wells Fargo will soon get the green light to grow again, allowing it to grow its balance sheet and make use of the capital that is building up. But even if the process is slow -- even if regulators take their time -- Wells Fargo can direct excess capital toward repurchasing shares at a low valuation. It received no objection to its plan to repurchase as much as $24.5 billion of stock, which would enable it to trim its share count by nearly 9%.
At roughly two times tangible book value, the market is letting this highly efficient bank trade too cheaply.
Jordan Wathen has no position in any of the stocks mentioned. Matthew Frankel, CFP owns shares of American Express and Bank of America. Sean Williams owns shares of Bank of America. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.