On the surface, the financial sector of the market may seem a bit sleepier than high-flying sectors like technology, but delve a little deeper and you'll find that there are some incredible stocks here, and some great values. Just ask Warren Buffett, widely acknowledged as one of the greatest investors of all time.
Buffett has long made financial stocks one of the key components of the portfolio at Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%), and he has done very well for Berkshire shareholders over the years by doing this. Part of his ability to generate great returns revolves about buying strong companies at a discount and holding onto the stock to give it time to produce.
Are you hoping to mimic Buffett's success? Here are three financial industry stocks with valuations that are too cheap to ignore.
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1. Ally Financial
When looking for great companies with stocks trading at valuations too cheap to ignore, Ally Financial (ALLY 6.73%) is a great place to start. The Detroit-based company has grown into the largest direct-to-consumer online bank in the United States. The 103-year-old company, which was formerly the finance arm of General Motors before becoming an independent company, maintains a large presence in auto lending. It also offers mortgage loans, an online brokerage, and a variety of other services, including traditional checking and savings accounts to consumers.
Shares of Ally actually trade at less than book value with a price-to-book ratio of just 0.9. Book value is simply the sum of a company's assets minus its liabilities. Price-to-book ratio, which is a common metric used for evaluating bank stocks, is then calculated by dividing a company's market valuation by this book value. So a price-to-book value of less than 1 means that a company's stock is valued at less than the total value of its assets. Theoretically, it means that if the company were to be liquidated, the assets would be worth more than the market value today. This gives investors a margin of safety when investing in a stock like Ally Financial with a price-to-book value of under 1.
Ally is also dirt cheap on a price-to-earnings basis of less than five times earnings and pays out a dividend that currently yields a market-beating 3.7%. The company is also a prodigious buyer of its own shares -- in the beginning of 2022, Ally announced a share repurchase plan that authorized it to buy back up to $2 billion worth of shares by the end of the year. This $2 billion is equal to a whopping 20% of the company's market cap today. Unsurprisingly, this inexpensive valuation and this commitment to shareholder returns recently caught the eye of Buffett himself, who initiated a position in the stock during the first quarter of 2022.
2. Citigroup
If you liked Ally Financial trading at less than book value, then you're going to love the valuation of this next pick -- Citigroup (C 0.26%). Its stock trades at an even cheaper price-to-book ratio of just under 0.6. Citigroup looks attractive on a price-to-earnings basis as well, trading at just six times earnings. The $100 billion New York-based bank offers many of the same services to consumers as Ally but also features an institutional segment that offers services such as investment banking and fixed income and equity sales and trading. Unlike Ally, Citigroup has a large international presence, with operations worldwide.
As you might have guessed, it's also a Buffett stock, and one that he recently added to Berkshire's portfolio as one of the company's new buys during the first quarter of 2022. Buffett wasted no time in going big on Citigroup -- it is now Berkshire's 15th-largest holding. As an added bonus, shares of Citigroup sport a dividend yield of just under 4%.
3. Goldman Sachs
Shares of legendary investment bank Goldman Sachs (GS -0.20%) aren't trading below book value, but they're not that much more expensive at a price-to-book value of just 1.1. Shares are also cheap using price-to-earnings, which gives the 153-year-old bank a price-to-earnings ratio of just 7.5. This all seems incredibly cheap for a leading investment bank of Goldman's size and stature, and well below the historical valuation it has typically enjoyed. Shares are down because 2022's tepid market hasn't been a great environment for IPOs or merger and acquisition activity.
At some point, these markets will heat up again and Goldman will be in prime position to benefit. In the meantime, it isn't as reliant on investment banking as it once was -- the company now features a consumer banking business called Marcus that it says will be accretive to returns. Its shares currently yield 3%, and it recently increased this dividend payout by 25% to $2.50 a share. Goldman is not a Buffett stock at this point in time, but given its attractive valuation and market-leading position, I wouldn't be surprised if it is on his watch list.
It makes sense to add these stocks to a portfolio
All in all, the financial sector features plenty of great stocks trading at attractive valuations, and these three are simply too cheap to ignore. Trading below book value (or slightly above in the case of Goldman Sachs), they give investors a nice margin of safety when investing in these high-quality companies, and all pay market-beating dividends, making them all sensible additions to investor portfolios.
