Finance stocks witnessed a roller coaster ride in 2019. The year begun with ambiguity over the Federal Reserve’s monetary policy, lingering U.S.-China trade conflict, uncertainty over impact of Brexit, expectations of a global economic slowdown and the U.S. government shutdown. These matters weighed on financials of the companies in the sector.
Nonetheless, the sector showed resilience, and as the year progressed, stocks were able to counter tough backdrop and emerge victorious despite three interest rate cuts. The Zacks Finance sector rallied 19.1% in 2019, marking a significant rebound from the disappointing 2018 performance, wherein the sector lost 14.3%.
Of the large number of finance sector stocks, only four are part of the Dow Jones Industrial Average (DJIA) index. Last year, these companies – JPMorgan JPM, Goldman Sachs GS, Visa V and American Express AXP – jumped 42.8%, 37.6%, 42.4% and 30.6%, respectively, whereas the DJIA gained 22.2%.
Price Performance in 2019
Will the Upside Continue in 2020?
Before we discuss the companies individually, let’s check how the economic scenario will be like as the finance sector’s performance largely depends on the health of the economy.
The U.S. economy continues to show strength with historically low unemployment rate and positive consumer sentiments. Per the Fed officials, the U.S. economy’s expected growth rate is 2.2% for 2019 and 2% for this year.
Further, with the central bank indicating a pause in rate cuts this year, this will likely act as catalyst for the finance sector.
JPMorgan is likely to continue benefiting from steady rise in loan demand and strong deposit base. This will support this Zacks Rank #2 (Buy) bank’s net interest income in 2020.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Further, the company is on track to open roughly 400 new branches in 15-20 new markets by the end of 2022, which will provide additional support. Also, in July 2019, it acquired InstaMed, which will enable it to expand into lucrative U.S. healthcare payments market.
Also, positive developments in several macroeconomic issues are likely to result in improvement in client activities, which will support JPMorgan’s trading revenues (constituting nearly 20% of the bank’s total revenues).
Further, global M&As, and debt and equity issuance volumes are expected to continue rising this year, driven by low interest rates and strong equity market performance. As JPMorgan is one of the leading players in investment banking space, this will provide additional leverage.
JPMorgan’s Zacks Consensus Estimate for earnings of $10.48 for 2020 has moved nearly 1% upward over the 30 days.
Goldman Sachs is undertaking measures to diversify revenues over the last few years. The company is focused on improving the GS Bank’s business, and thus acquired the online deposit platform of GE Capital Bank in 2016.
The company has also launched a digital consumer lending platform — Marcus by Goldman Sachs. Additionally, it is likely to benefit from exposure to the fast-growing exchange-traded funds market.
With the company generating approximately one-fourth of its net revenues from trading activities, any positive development on that front will further support top line. Additionally, it is at a top position in the investment banking space. Thus, investment banking fees are expected to continue rising, driven by the factors mentioned above.
Also, this Zacks Rank #3 (Hold) company is restructuring of its business segments. The changes “better reflect how the firm is now managed” and will “drive greater accountability” for moving the business forward. Notably, the bank’s move reflects its ongoing commitment for organizing the firm in a client-centric way. (Read more: Goldman Sachs Streamlines Units, Increases Transparency)
Also, Goldman looks undervalued with respect to Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios. The stock has a P/E ratio of 9.99, which is lower than the industry average of 10.46. Also, its P/B ratio of 1.03 is below the industry average of 1.89.
Further, it has been witnessing upward estimate revisions. The company’s earnings estimates of $23.79 for the current year have moved slightly north over the past 30 days.
New deals, renewed agreements, accretive acquisitions, increasing spending via cards, shift to digital form of payments and expansion of service offerings are likely to continue driving Visa’s revenues. Notably, steadily rising online sales numbers bodes well for this payment processing company.
Further, inorganic expansion strategy continues to be a growth driver for Visa. These initiatives have helped the company to maintain its leading position in the payment network space with 50% more payments volume than its closest competitor, Mastercard (MA). Moreover, the company expects acquisitions to add nearly 0.5% to its fiscal 2020 revenues.
Also, this Zacks Rank #3 company is making investments in technology to further boost its already leading position in the payments market. The company is also pushing technologies, including contactless and scan-to-pay, tap-to-pay, and secure remote commerce, which are expected to be the primary modes of payment going forward. With only 15% of global payments occurring digitally at present, the company has a huge runway for growth in the emerging payments industry.
For fiscal 2020, Visa expects annual net revenues to grow in low double digits on a nominal basis.
Also, the company’s earnings estimates of $7.23 for fiscal 2020 have moved marginally upward over the past 30 days.
Strong brand, continued efforts toward building business in new growth verticals, shift toward digitization, focus on initiatives and a strong economy, which are driving consumer spending, will support American Express’ revenues this year. Also, a number of growth initiatives such as launching new products, enhancing features of existing ones and modifying price will offer support.
American Express’ billed business has been growing over the past several quarters. With its efforts regarding upgrading premium card products, launch of new and refreshed Platinum cards, and expansion of partnerships, billed business is projected to improve further.
This Zacks Rank #2 company is working to provide digitized services to its customers. It has acquired a number of digital companies over the past 18 months. These deals, along with new digital features and contents that American Express is building in-house, will enable its card members to engage more and thus, drive card usage volumes and revenues.
Also, American Express currently has a Value Score of B. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Further, the company’s earnings estimates of $9.01 for 2020 have moved slightly north over the past 30 days.
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