While stocks in the financial sector are down on average by nearly 16% year to date, don't be scared away from investing in the sector. While financials have been hit hard by the pandemic and recession, for every bank stock that's down 35%, there is a fintech that's up for the year. Some have even performed better during the pandemic. And even among those stocks that are down, there are many great values that you can pick up relatively cheap.
Here are two financial sector stocks I'd buy right now -- one that will be a growth engine for years to come, PayPal Holdings (PYPL -1.65%), and one that's a terrific value, Axos Financial (AX -2.15%).
1. PayPal hitting all-time highs during pandemic
The services that PayPal provides -- digital and mobile payments -- have been especially critical for consumers and merchants during the COVID-19 pandemic. PayPal's payment volume increased 29% in the second quarter compared to the same period last year, and PayPal's number of active accounts climbed 40% year over year to 346 million.
As a result, revenue climbed 22% to an all-time high of $5.3 billion, and net income spiked 85% to $1.5 billion in the quarter. Venmo, PayPal's mobile payment service, provided a huge boost, generating $37 billion in total payment volume in the quarter, up 52% from the second quarter of 2019. It has all contributed to a stock price that is up 73% year to date.
But I wouldn't buy PayPal now just based on its performance this year. What's far more enticing are the company's long-term growth prospects. PayPal is the market leader in online payments, and it has steadily increased its market share, which is 55%, through innovations like Venmo.
The company now stands as the leader in a space that's rapidly growing as the world moves toward cashless payments, a trend that has been accelerated by the pandemic. What puts PayPal in a great position to continue to grow with the industry is its strong cash position. Cash flow from operations jumped 103% to $2.4 billion in the second quarter year over year, and free cash flow increased 112% to $2.2 billion. That much free cash flow means the company has a lot of money to invest in new technologies to expand its growth opportunities, like its current investment in touch-free QR code technology for payments.
Now is a particularly good time to buy PayPal, as the stock price has dropped about 6% in the past month due to the September tech sell-off.
2. Axos has a lot of value
Axos Financial is an online bank that is a buy for a different reason than PayPal. It is a great value right now with long-term growth potential. The stock is down about 26% year to date, but that drop has largely been a function of the pandemic and economy, which has hurt all banks. However, the underlying fundamentals are very strong.
In its fiscal fourth quarter, ended June 30, Axos posted net income of $45.3 million, up 11.5% year over year. For the full fiscal year, which included two quarters of a pandemic, net income was up 18% to $183 million.
One of the factors that has set Axos apart is its high-quality loan portfolio. It is primarily a mortgage lender of asset-backed loans, which are safer than commercial loans to hard-hit industries. President and CEO Gregory Garrabrants said on the fourth-quarter earnings call that about 94% of the company's loans had a loan-to-value (LTV) ratio in the 50s -- which is excellent. The LTV measures the value of the loan relative to the assets, so the lower the better because less is outstanding. This is one of the reasons why Axos had a relatively low provision for credit losses -- $6.5 million in the quarter -- compared to other banks.
There are two other numbers that jump out at me about Axos. One is its efficiency ratio, which is a spectacular 49.1%. This means that its expenses relative to its earnings are low. That's down from 51% a year ago. The efficiency ratio for just the banking business is 41%, down from 43% year over year.
The other is its price-to-book ratio, which is the value of its assets versus its stock price. It has a price-to-book ratio of 1.15, which means that the stock is trading at a pretty low price relative to its assets on the books. The price-to-earnings ratio is also low at about eight, meaning the stock is low-priced relative to its earnings.
These are all factors that make Axos a great value right now. It is in a better position than its peers, and should remain so as an online banking leader at a time when consumer behaviors and trends are moving in its direction.