Oppenheimer Sees Recovery for Top Financial Stocks Despite Tough Third Quarter

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Between the sharp back-up in long-term rates that will penalize mortgage and trading results, and the ongoing political bloodlust that reflects itself in fines and litigation accruals, the banking analysts at Oppenheimer think this will be a difficult quarter for the large banks. Given that, and the fact that the banking index (BKX) is up 24% year-to-date, investors may well be set up for a little profit taking.

The Oppenheimer team's inclination would be to use any significant pullback as a buying opportunity, because overall they see the sector continuing to recover. While it is well known that credit quality is improving, the analysts still believe most investors underestimate the longer term positive impact of that improvement. In a research report out Thursday, they highlight the top stocks to buy in the sector.

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Citigroup Inc. (NYSE:C) has agreed to pay $395 million to Freddie Mac to settle claims on loans the bank sold to the government entity. While the financial hit stings, the headline risk is lifted and the bank can proceed forward, where business has been solid. Oppenheimer raised its price target from $61 to $62. The Thomson/First Call estimate is at $60. Investors are paid a tiny 0.1% dividend. Citigroup closed Wednesday at $49.26.

CIT Group Inc. (CIT) stock has dropped 6% since Sept. 18, after the Federal Reserve kept its financial stimulus going at current levels. That Fed stimulus has kept interest rates low, and CIT is a company that would have benefited if they rose. Oppenheimer thinks this may offer investors a timely entry point, as ultimately rates will rise. The Oppenheimer price target for the stock is $55, the same as the consensus target. CIT closed Wednesday at $47.99.

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Capital One Financial Corp. (COF) has continued to aggressively pursue credit card business, and its advertising moxie has paid off. The bank even has courted more subprime-type clients to expand its top line revenue growth, a move that could prove dicey of the economy rolls over again. Oppenheimer has a $78 price objective for the stock, while the consensus target is at $75. Investors are paid a 1.7% dividend. The stock closed Wednesday at $69.19.

Discover Financial Services (DFS) is another financial name that has kept the pedal down in trying to attract new credit card customers. The company issues the Discover card, America's cash rewards pioneer, and offers home loans, private student loans, personal loans, home equity loans, checking and savings accounts, certificates of deposit and money market accounts through its direct banking business. The Oppenheimer price target is pegged at $57, and the consensus is posted at $57. Investors are paid a 1.5% dividend. Discover closed Wednesday at $50.83.

J.P. Morgan Chase & Co. (JPM) was reported Wednesday as possibly being ordered to pay up to $11 billion dollars in fines and penalties. We wrote this morning about how the billions of fines and fees are really starting to add up for the banking powerhouse. Oppenheimer has $71 price target for the stock, fines notwithstanding. The consensus target is much lower at $63. Investors are paid a 2.7% dividend. The stock closed Wednesday at $51.70. The Oppenheimer target is the highest on Wall Street and would represent a 20% gain for investors.

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The single most obvious and prominent fact about the banking environment during the past several months is that long-term interest rates have backed up ever since Fed Chairman Bernanke floated the trial balloon of tapering its bond-buying program in May. That was the sign to leveraged traders that the bond carry trade and excess margin to do it needed to be wrapped up. The market already has begun pricing in the end of the tapering. The quality stocks to buy have moved down as a result and offer investors looking for exposure to the financial sector a choice entry point.

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