The market’s sell-off has put some solid stocks on sale, none more so than those in the embattled finance sector. Year-to-date, the BKX (KBW Nasdaq Bank Index) is down 43% compared to the S&P 500’s 24% downturn.
Up until recently, Oppenheimer’s Dominick Gabriele has been recommending investors “take chips off the table,” but the extent of the pullback now presents opportunity.
“Financials are cyclical, and this recent sell-off illustrates to us that, as we expected, investors still see them that way and will panic-sell them ahead of economic worries as they were a big part of the last recession,” Gabriele wrote. However, “We think this market is presenting a very rare opportunity to buy your favorite names at a discount… Coronavirus will impact the economy, but we think the impact is temporary and investors focused on what prices could be 12-18 months from now should hold their breath and buy,” the analyst added.
Gabriele has singled out three of his favorite stocks in the financial sector, which he believes are best-positioned to outperform the market. We’ve used TipRanks data to get a better sense of what other Wall Street analysts think about Gabriele’s endorsements and the results are interesting. The Street is aligned with the Oppenheimer analyst, as it happens, as all 3 are Buy-rated and present possible upside of 20% or more. Let’s get the lowdown.
Synchrony Financial (SYF)
Let’s start off with Synchrony Financial, the largest provider of private label credit cards in the U.S. The company offers a range of credit services including private-label credit cards, small to medium sized business credit products, and installment loans. SYF counts brands such as Amazon, Cathay Pacific, and OneTravel among its clients.
Like the majority of the sector, the fear of consumers spending less on account of the outbreak means the Connecticut-based company has taken a beating since the outbreak began. SYF shares have lost half of their value year-to-date. Having just bounced off a 52-week low, Gabriele recommends building a position in Synchrony.
One of the reasons why Gabriele likes Synchrony is because 20% of their revenue is exposed to home improvement and an additional rate reduction should likely lead to more spending in the area. “We have said rates could go to 0% for the past two years and many disagreed, but we think it’s fair to say that if there’s a 125 basis point rate cut before unemployment gets worse, there aren’t many shots left in that gun,” the analyst said. With the Fed just announcing it is dropping its benchmark interest rate to zero, it turns out Gabriele hit the nail on the head.
Additionally, despite a contract loss with Walmart, SYF is still building strong new relationships. In 4Q19, the company announced a partnership with Verizon, which will make Synchrony the exclusive issuer of a co-branded Verizon credit card. In addition to Verizon, SYF will oversee a rollout of PayPal/Venmo products in 2H20. Partnership announcements, Gabriele said, “give us confidence in SYF’s market strategy.”
The analyst further added, “Even as SYF sees some pressure on ROA, we think as the partnerships grow and the upfront investment subsides, SYF will recapture some of its ROA through mild efficiency gains and growth. We don’t think SYF is ‘behind in tech.’ This investment is to build out partnership platforms/teams. Ultimately, we think SYF’s franchise is only improving, and as investors focus on FY2021, SYF’s fundamental trajectory may be back on track.”
Gabriele stays with an Outperform rating on SYF along with a $37 price target. This conveys the analyst’s confidence in Synchrony’s ability to soar 96% in the year ahead. (To watch Gabriele’s track record, click here)
With 6 Buys and 4 Holds, Synchrony currently has a Moderate Buy consensus rating. Given its average price target of $37.90, analysts see room for further upside in the shape of 106%. (See Synchrony stock analysis on TipRanks)
American Express (AXP)
Next up is a financial services giant, the multinational American Express. The bluest of blue chips is a household name, but that hasn’t made it immune to the downturn in the market. American Express, like the rest of the sector has seen better days and its share price is down by 28% year-to-date.
American Express depends on travel and since the travel industry is one of the sectors most adversely affected by the coronavirus, the company has been hit hard. However, Gabriele thinks that although people might not be traveling as much or going on vacation, they are still likely to spend their money in other places. Furthermore, the analyst points out that American Express is also a financial name that benefits from rate decreases. “Oil has fallen drastically and as AXP is consumer spend/credit focused, lower oil should help loss rates,” the analyst explained.
It should also be noted that American Express generally caters to more well-to-do clients. The short-term impact of the current public health crisis is less likely to have a lasting effect on this particular type of clientele.
Gabriele added, “AXP’s success in tapping its existing customers—through higher value propositions/higher annual fees/spend/ lend—is the result of a culture that consistently invests in the business for the long-term, particularly in a favorable revenue environment. FY2020 card fee growth will likely remain elevated given the ramp and tailwind of refreshed products and introduction of many new corporate and consumer cards. As lending remains 20% of total revenue, we think investors will place additional value to the company’s less balance-sheet-intensive model resulting in a higher P/E multiple.”
As a result, Gabriele reiterated an Outperform call on AXP, and kept his price target at $159. The implication for investors? Possible upside in the shape of 82%.
Overall, TipRanks suggests optimism with some caution baked into expectations when it comes to Wall Street’s majority perspective on the credit card giant. Out of 18 analysts tracked in the last 3 months, analysts are split between the bulls and the naysayers on AXP: 9 suggest Buy, 8 say Hold, and only one recommends Sell. Importantly, the 12-month average price target stands at $132.75, marking nearly 45% in upside potential from where the stock is currently trading. (See AXP stock analysis on TipRanks)
Encore Capital Group (ECPG)
Gabriele’s third pick from the financial sector is Encore Capital Group. The company is the largest publicly traded debt buyer by revenue in the United States, with operations and investments in 15 countries. Encore’s subsidiaries buy portfolios of consumer receivables from major banks, credit unions, commercial retailers, and telecommunications companies.
Given its market cap of $1.1 billion, Encore is significantly smaller than the two previous names on our list. The San Diego-based company also differs from its larger colleagues in terms of its market performance this year. Despite the turbulence, Encore has only dipped 1% year-to-date.
Adding to the good news, the company posted both top and bottom line beats in its most recent quarter. EPS of $1.56 exceeded the estimate by $0.11 and revenue of $347.79 million delivered a small beat of $0.13 million. For full year 2019, Encore had global deployments of $1 billion, including a record $682 million in the U.S.
Gabriele thinks “investors should slowly build a position in Encore.” He argued, “ECPG continues to execute its strategy of cost-cutting and profitability improvement in its underlying business. Recent US vintages at better pricing and channel mix to call center/digital, are allowing ECPG to post better cost to collect rates. Not standing idle as it delivers in the EU, the company has set up new investment partnerships to take advantage of improving pricing through servicing while keeping capital requirements low.”
To this end, Gabriele maintained a $39 price target to go along with his Outperform rating. Investors stand to take home an 11% gain, should the target be met in the coming months.
What does the rest of the Street think? It turns out that they wholeheartedly agree with Nadeau. With 5 Buy ratings and no Holds or Sells, the message is clear: ECPG is a Strong Buy. If that wasn’t enough, the $46.75 average price target puts the upside potential at 33%. (See Encore stock analysis on TipRanks)