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5 Great Value Picks in the Financial Sector

Zacks Equity Research

With the U.S. gross domestic product increasing at a 1.5% annual rate in the third quarter compared with 3.9% in the previous quarter, the cutback in production to avoid an inventory glut has also cut short the hopes of a rate hike in December this year.

While the Fed hinted at a December rate increase and rendered the growth in economy as "moderate," a strengthening dollar, deep spending cuts by energy firms, lower business spending as well as declines in manufacturing, wholesale and retail inventories indicate something else.

However, there is still some optimism left due to the slowdown in imports and a relatively healthy labor market along with the strong consumer spending data, which rose at a 3.2% annual pace in the third quarter. Also, consumer spending is expected to remain strong in the fourth quarter, reflecting strong underlying momentum of the economy. These fuel the chances of a rate hike in the final Fed meeting this year.

Though domestic demand remains healthy, global weakness and moderate growth pace of the U.S. economy makes the rate hike debatable. While things become clearer, adopting the old school way of investing in low P/E stocks can prove to be a good bargain for investors instead of waiting for the next Fed move.

A thorough analysis of the company’s growth potential to determine if the particular company has a bright future, along with a low P/E, will assure more returns.

Why the Finance Sector?

As of Oct 28, 2015, we have third-quarter results from 54 of the sector’s 85 members in the S&P 500 index that account for 63.5% of the sector’s total market cap in the index. Total earnings for these 54 Finance sector companies are up 7.1% from the same period last year on 1.6% lower revenues, with 55.6% beating EPS estimates and only 44.4% beating revenue estimates. (Read: Taking Stock of the Q3 Earnings Season)

Though the sector reflected top-line weakness, it fared better than sectors like basic materials, consumer staples, industrial products, energy and utilities. The finance sector has displayed improvement on the back of fewer litigation charges, effective cost-control measures and modest progress in core business lines despite a very unsupportive interest rate backdrop, thus making it a perfect sector for investment.

5 Undervalued Finance Stocks to Bet on

With the help of Zacks Stock Screener, we have shortlisted 5 stocks in the finance sector that sport a Zacks Rank #1 (Strong Buy) or 2 (Buy), trade at a Price/Earnings (F1) ratio of less than 15, carry Value Style Score of ‘A’ and have projected EPS growth rate (F1/F0) of 10% or higher.

Using our new style score system, one can locate stocks that have a solid upside potential. Our Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 handily beat other stocks.

Federal Home Loan Mortgage Corporation FMCC: The Virginia-based company is a stockholder-owned corporation that supports homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage passthrough securities and debt instruments in the capital markets.

Zacks Rank #2
P/E (F1): 0.83x
Value Score: ‘A’
Projected EPS Growth: 473.6%

Federal National Mortgage Association FNMA: Headquartered in Washington, the company provides liquidity and stability support services for the mortgage market in the U.S. It securitizes mortgage loans originated by lenders into Fannie Mae mortgage-backed securities.

Zacks Rank #2
P/E (F1): 1.13x
Value Score: ‘A’
Projected EPS Growth: 1,157.9%

Ally Financial Inc. ALLY: The Michigan-based company provides financial products and services primarily to automotive dealers and their customers in the U.S. It offers dealer financial services, including a range of financial services and insurance products to automotive dealers and retail customers.

Zacks Rank #2
P/E (F1): 10.28x
Value Score: ‘A’
Projected EPS Growth: 19.9%

HCI Group, Inc. HCI: Headquartered in Florida, it is a holding company that conducts its business activities through its subsidiaries. It is engaged in diverse business activities, including property and casualty insurance, information technology, real estate and reinsurance.

Zacks Rank #2
P/E (F1): 7.59x
Value Score: ‘A’
Projected EPS Growth: 11.2%

Medley Management Inc. MDLY: The New York-based company is an asset management firm. It engages in providing institutional and retail investors with yield-oriented investment products that pay periodic dividends or distributions.

Zacks Rank #2
P/E (F1): 7.19x
Value Score: ‘A’
Projected EPS Growth: 73.2%

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