2018 wasn't a great year for the stock market, and banks were especially hard-hit, with the financial sector diving by nearly 15% for the year. As a result, there are some rock-solid financial institutions trading for ridiculously low valuations.
With that in mind, here are two that look like especially strong bargains as 2019 gets underway, and a little about each one.
Image source: Getty Images.
|
Company |
Recent Stock Price |
P/E Ratio (TTM) |
Price-to-Book Value |
|---|---|---|---|
|
Goldman Sachs (GS +0.38%) |
$198.10 |
7.9 |
0.83 |
|
Axos Financial (AX +0.20%) |
$27.43 |
11.3 |
1.76 |
Data source: yCharts. Data obtained 1/22/19.
An amazing institution with lots of potential (and one big issue keeping it cheap)
Check out the latest Goldman Sachs earnings call transcript.
Goldman Sachs is my favorite overall opportunity in banking right now. Not only is the bank doing a great job of maintaining its market share in its core investment-banking business and generating better-than-expected trading revenue in a challenging environment, but it's also just starting to tap its "main street" potential.
Since launching in late 2016, the Marcus by Goldman Sachs consumer banking platform has grown rapidly. The no-fee consumer-centric approach to personal lending has caught on, as the bank lent more than $4 billion during its first two years. And the Marcus savings account platform has $29 billion in deposits as of the latest data, attracting yield-seeking savers with its best-in-class (as of this writing) annual percentage yield on savings accounts.
While these are certainly impressive numbers for such a young platform, they are still tiny in the context of some of the big banks. For example, Bank of America has about $290 billion in loans and $687 billion in deposits on its consumer banking division's balance sheet. So there's tons of room for Goldman to grow in these areas.
However, Goldman Sachs is cheap for a reason right now. Investors are concerned about the bank's potential liabilities related to the 1MDB scandal, which could easily extend well into the billions -- Malaysia is trying to recoup $7.5 billion, and the U.S. Justice Department is doing its own investigation.
I see the risk as largely priced in at this point, so now could be an excellent opportunity to get into Goldman for less than book value and at a single-digit P/E multiple.
A high-growth bank at a value stock price
Check out the latest Axos Financial earnings call transcript.
Axos Financial, which many investors still know better as BofI Holding, is a small yet rapidly growing financial institution. With about $10 billion in assets, BofI is roughly 1% of the size of Goldman Sachs, so these two banks are at completely different ends of the spectrum.
If you aren't familiar, Axos is an online-based financial institution with no branches, specializing in high-yield checking and savings accounts as well as mortgage financing, although the bank does have several other key business segments.
Growth has been impressive. In the most recent quarter, Axos grew its total assets by 14% year over year, loan originations jumped by 28%, and adjusted earnings per share surged 22%. And, thanks to its online-only business model, profitability and efficiency are miles ahead of most brick-and-mortar competitors.
With lots of room to continue its growth story, Axos looks like a steal at its lowest P/E and price-to-book multiple (more on that in the next section) since 2016.
Another metric that works great with banks
As a final thought, while the P/E ratio is perhaps the most widely used and well-known way to gauge the valuation of stocks, it's important to mention that this metric all by itself doesn't provide the full picture of whether a bank stock is cheap or expensive. Price-to-book (P/B) and price-to-tangible-book (P/TB) are two others to consider that are especially useful when it comes to banks.
Price-to-book is a ratio of a bank's stock price in relation to the per-share value of its assets and is an excellent valuation metric that works especially well with banks. Generally speaking, higher-quality and higher-growth banks trade for higher price-to-book multiples. For this reason, this can be a great way to differentiate between banks with similar P/E ratios. Price-to-tangible-book is similar to price-to-book, but excludes intangible assets like brand names, goodwill, etc. With some banks, there is a big difference between the two, and P/TB is the more conservative of the two metrics.
