The financial sector has taken quite the beating this year. Banks, lenders, insurance companies, financial service firms, and payment processing companies are battling inflation, rising interest rates, and market volatility. These pressures have pushed some of the best financial stocks like Bank of America (BAC -0.21%), Block (SQ 2.32%), and Blackstone Group (BX -0.03%) down by 27% or more at the time of this writing, even though each of those companies has tremendous long-term opportunities.
Here's why September could be a great time to add these discounted stocks to your portfolio.
1. Bank of America
Benchmark interest rates have been at historically low levels for close to 15 years. So the Federal Reserve's recent benchmark rate hikes have been welcomed by banking institutions like Bank of America. Those higher rates mean banks can earn more interest on the loans they make.
Bank of America's net interest income in the second quarter -- i.e., its net income after funding its assets and securities -- was up by $2.2 billion or 22% from last year and up 7% from last quarter. It's also spending less and earning more. Its efficiency ratio -- which measures how much Bank of America has to spend for each dollar of income -- is down to 54%.
Home price growth has also helped its average loan balance grow by 12%. Couple that with increased interest on those balances and Bank of America has a clear path to grow its revenue. Rising interest rates should work in its favor in the year to come, but that growth opportunity isn't necessarily reflected in the bank's share price.
Recessionary concerns as well as its lower-than-required reserves for year's end have left investors feeling less enthusiastic about its future. A recession would certainly impact the number of loans it creates, and preserving capital to meet reserve requirements could hinder its revenue growth.
However, today's price-to-earnings (P/E) ratio of 11 makes the stock a steal of a deal for long-term value investors, even with the short-term headwinds the bank could be facing. Plus, Bank of America stock pays a dividend. At today's share price, its yield is nearing 2.5% and the bank's payout ratio of just under 30% is conservative, meaning its payout should be sustainable for the foreseeable future.
2. Block
Shares of fintech company Block have been absolutely hammered -- they're down 74% over the past year. General market volatility and declining economic conditions have weighed heavily on the payment processing and credit company. The more people who use Block to purchase goods or services, the greater its revenue. A recession could certainly cut into its transaction volume. But such a setback would only be temporary.
Block has only reached around 3% market penetration, leaving it with plenty of room to expand. The company recently launched its Clearpay "buy now, pay later" program in the U.K. It has also reported strong earnings as of late. In Q2, its gross profit grew 29% year over year and was up 14% from the previous quarter. However, its EBITDA (earnings before interest, taxes, depreciation, and amortization) is steadily declining, and on the bottom line, it booked a net loss of $208 million in Q2 -- another reason for its discounted share price.
Overall, however, I believe its long-term tailwinds, including new products and its strong user penetration, should allow it to grow its market share in the coming decade, making today's low price a great buying opportunity.
3. Blackstone
Financial stocks aren't necessarily known for their ultra-high dividend yields. In fact, some of them don't pay dividends at all. But asset management and investment firm Blackstone is an outlier in that respect. Paying a dividend that (at the current share price) yields over 5%, the company (including its subsidiaries such as the private Blackstone Real Estate Investment Trust) has grown tremendously over the past few years, making it one of the top financial stocks today.
Blackstone's revenue is primarily fee-based income from the investments it manages through its financial services arm. As of the end of Q2, it had $914 billion in assets under management, making it one of the largest investment firms in the world. Its fee-related earnings grew by 54% over the past year while its distributable earnings jumped by 86%. Inflows of investor capital reached $88 billion in Q2, the second-highest level in the company's history.
Blackstone is putting that money to good use. It is rapidly expanding its portfolio, particularly in the real estate space. In 2021, it branched out into the data center industry by acquiring QTS Realty Trust; it's very active in the single-family and apartment rental business; it's currently in the process of acquiring American Campus Communities; and it just closed on the purchase of another REIT, PS Parks Business.
The stock price is down 27% year to date and boasts an attractive P/E ratio of 17. Given its current growth opportunities and its attractive dividend yield, Blackstone is a major value buy within the financial industry.
