The major market benchmarks are still knocking on the door of their all-time highs, but that doesn't mean that all stocks are expensive. In the financial sector, some Fool.com contributors believe the exact opposite is true. We asked three of our writers to share the stocks on the top of their own watch lists, and here's why they say Goldman Sachs (GS 1.87%), Moody's (MCO 0.68%), and Citigroup (C 2.04%) are worth a look right now.
The winner of second-quarter earnings season
Matt Frankel, CFP (Goldman Sachs): Now that we've seen the latest results from the big U.S. banks, it's apparent that Goldman Sachs is one of the winners of the second quarter. For starters, the bank shattered expectations on both the top and bottom lines, with about $630 million in revenue and $0.92 in earnings per share beyond what was expected.
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Digging a little deeper, there were lots of positive things in Goldman's recent performance. The active second-quarter IPO market gave the bank a 78% increase in equity underwriting revenue as compared to Q1, and unlike most major competitors, Goldman actually beat expectations when it came to equity trading revenue. Wealth management assets under supervision grew to a new record, and Goldman's expenses were actually 6% lower than at the same time last year.
Furthermore, Goldman's push into consumer banking continues to translate into higher revenue. Goldman's investing and lending segment (which includes the Marcus lending and savings account platform) saw revenue jump by 16% year over year, and with a new credit card partnership with Apple launching soon, as well as a "Main Street" investment platform under development, it's tough to imagine this growth rate slowing down.
Surprisingly, Goldman Sachs trades for about 13% less than book value thanks to uncertainty surrounding its 1MDB bond scandal, so this could be a great time to get in at a discount.
A boring company with a wide moat
Matthew Cochrane (Moody's): In 1900, John Moody first began publishing manuals filled with statistics and figures on publicly traded securities, selling out the first printing within two months. Fast-forward 120 years, and Moody's is still producing financial information that is in high demand by investors.
The company now operates two divisions, Moody's Investors Services (MIS) and Moody's Analytics (MA). MIS houses its credit ratings agency, which issues ratings for corporate and government bonds. As a credit ratings agency, Moody's enjoys status as one of the "big three," along with S&P Global and Fitch Ratings. Collectively, the big three control more than 90% of the market share for credit ratings agencies in North America and Europe due to their track records and name recognition. This brand equity coupled with the industry's strict regulations makes it hard for new companies to enter the market, creates a wide economic moat, and gives Moody's credit ratings business incredible pricing power.
MA provides financial information, software, and consulting services. The profit Moody's is able to generate from its credit ratings agency business allows it to pour money into its analytics division and make strategic investments and acquisitions. In the past 12 months alone, Moody's has acquired Reis, a provider of commercial real estate data, and Vigeo Eiris, a company that analyzes environmental, social, and governance (ESG) data.
Moody's full-year 2018 adjusted operating margin was an incredible 47.7%. Its stock currently trades at a forward P/E of about 26. Given the company's moat and pricing power, that seems like a worthy investment -- which is exactly why Moody's occupies a place in my personal portfolio.
Summer in the Citi
Dan Caplinger (Citigroup): Ever since the financial crisis, Citigroup has lagged behind most of its fellow major banking institution peers. Unlike many other banks, Citigroup's stock remains well below where it traded before its huge drop in 2008, and because of the massive dilution that the company suffered during the crisis, it could take decades for the bank to get back to its former glory.
Fortunately for new investors, Citigroup doesn't have to rise all the way to its former highs before it can generate a solid return, and the financial giant has finally started to kick its operations into high gear. Last month, the company announced a capital plan that included a 13% increase to its quarterly dividend to $0.51 per share, as well as a stock repurchase authorization that will let Citi spend up to $17.1 billion over the next 12 months to buy back its shares. The total amount Citigroup expects to return to shareholders adds up to $21.5 billion, and the buyback alone could let the banking giant repurchase as much as 10% of its outstanding shares at current prices.
Citigroup isn't the only bank to see strong performance over the past year, but it's still nice to see the company keeping up with the pack rather than straggling behind. With further effort, Citigroup should be able to reestablish itself as fully deserving of its status as one of the biggest banking institutions in the nation.
