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3 Financial Stocks to Buy in 2014

By Alexander MacLennan - Jan 5, 2014 at 2:00PM

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Even after a near 30% market rally in 2013, these financials still offer attractive values.

With the S&P 500 index surging nearly 30% in 2013, equity investors have had a bumper crop of returns. But as we enter 2014, those looking to reinvest profits are having a tougher time finding value than they did a year ago.

However, JPMorgan Chase (JPM 1.66%), Citigroup (C 0.70%), and American International Group (AIG 1.92%) may still offer hope for value-oriented investors.

(JPM 1.66%)

While $13 billion is a big number, JPMorgan is well equipped to handle it having set aside an even larger amount for legal settlements years ago. The real question is what JPMorgan looks like going forward.

Looking at the company from an earnings perspective, shares are exceptionally cheap when compared to the broader market. Based on estimates from Businessweek, JPMorgan shares trade at a forward P/E ratio of only 9.6 times compared to the 16.7 times forward P/E ratio for the S&P 500 index. Add to that forecasts for increasing earnings over the next several years and a nice 2.6% dividend yield, and JPMorgan Chase is worth looking at for the value-seeking investor.

(C 0.70%)

The bank currently trades at 0.9 times tangible book, giving investors upside even if the bank only rises to tangible book. But there could be much greater upside considering banks historically trade at a significant premium to tangible book.

While Citigroup's penny per quarter dividend is nothing to write home about, the potential for a dividend increase creates a catalyst for the stock. The tiny yield right now is seen as everything from poor performance to an insult by income investors. As Citigroup continues to recover and grow, a dividend increase should be in the cards, attracting more income investors.

Insurance sale
Ever since its 2008 bailout, the name American International Group has always reminded investors of the insurer's near-collapse following its excessive risk taking at the height of the mortgage bubble. But AIG has been turning around by eliminating the government's stake, buying back billions in stock, selling off non-core assets, and reinstating a small dividend.

Even after all this, AIG still trades at only 0.7 times book value in an industry where peers trade closer to 1.0 times. This discount can be partially attributed to recent performance at AIG's property and casualty unit and the negative impressions surrounding the AIG name on Wall Street.

But there are some catalysts for AIG stock in the near future. The insurer recently announced a deal to sell its aircraft leasing unit, International Lease Finance Corp, to AerCap Holdings (AER 4.13%) for $5 billion in cash and AerCap stock. AIG has now moved out of another non-core asset and will likely sell its AerCap shares over time. The cash raised from the sale of ILFC could go toward growing the core business, increasing the dividend, or buying back shares at a discount to book value.

Just because the market rallied in 2013 doesn't mean investors can't find value; they just need to know where to look. JPMorgan Chase, Citigroup, and AIG all trade at a discount to the S&P 500 index based on forward earnings, with Citigroup and AIG offering attractive tangible book and book value comparisons.

Alexander MacLennan is long January 2015 $40 calls on Citigroup, long January 2015 $45 calls on Citigroup, and long January 2021 $45 AIG warrants. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group, Citigroup, and JPMorgan Chase and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
$54.38 (0.70%) $0.38
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$122.13 (1.66%) $1.99
American International Group, Inc. Stock Quote
American International Group, Inc.
$57.41 (1.92%) $1.08
AerCap Holdings N.V. Stock Quote
AerCap Holdings N.V.
$50.46 (4.13%) $2.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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