On the surface, the financial sector of the market might seem a bit sleepier than high-flying sectors like technology, but dig a little deeper and you’ll find there’s some incredible stocks here and some great values. Ask Warren Buffett, widely recognized as one of the greatest investors of all time.
Buffett has long made financial stocks one of the key components of Buffett’s portfolio. Berkshire Hathaway (BRK.A 0.62%) (BRK.B 0.80%), and he has done very well for Berkshire shareholders over the years by doing this. Part of his ability to generate great returns is buying strong companies at a discount and holding the stock to give it time to produce.
Do you hope to emulate Buffett’s success? Here are three stocks in the financial sector whose valuations are too cheap to ignore.
1. Allied Financial
When looking for big companies whose shares are trading at valuations too cheap to ignore, Allied Financial (ALLY 5.76%) is an excellent starting point. The Detroit-based company has become the largest direct-to-consumer online bank in the United States. The 103-year-old company, which was previously the financial arm of General Motors before becoming an independent company, maintains a significant presence in automobile credit. It also offers mortgages, online brokerage and a variety of other services, including checking accounts and traditional savings accounts to consumers.
Ally shares are actually trading at a price below their book value with a price-to-book ratio of just 0.9. Book value is simply the sum of a company’s assets minus its liabilities. The price-to-book ratio, which is a common measure used to value bank stocks, is then calculated by dividing a company’s market value by this book value. Thus, a price-to-book ratio of less than 1 means that a company’s shares are valued at less than the total value of its assets. Theoretically, this means that if the company were to be liquidated, the assets would be worth more than the current market value. This gives investors a margin of safety when investing in a stock like Ally Financial with a price-to-book ratio of less than 1.
Ally is also very cheap on a price-earnings basis of less than five times earnings and pays a dividend that currently earns 3.7%, which beats the market. The company is also a prodigious buyer of its own stock – in early 2022, Ally announced a stock buyback plan that allowed it to repurchase up to $2 billion worth of stock by the end of the year. . These $2 billion now represent 20% of the company’s market capitalization. Unsurprisingly, this cheap valuation and commitment to shareholder return recently caught the attention of Buffett himself, who initiated a position in the stock during the first quarter of 2022.
If you liked Ally Financial trading at less than book value, then you’ll love the review of this next pick – Citigroup (VS 2.11%). Its stock trades at an even cheaper price-to-book ratio of just under 0.6. Citigroup also looks attractive on a price-to-earnings basis, trading at just six times earnings. The $100 billion New York-based bank offers many of the same consumer services as Ally, but also includes an institutional segment that offers services such as investment banking and the sale and trading of income securities. fixed and shares. Unlike Ally, Citigroup has a large international presence, with operations around the world.
As you might have guessed, it’s also a Buffett stock, and one he recently added to Berkshire’s portfolio as one of the company’s new buys in Q1 2022. Buffett wasted no time getting big on Citigroup – it’s now Berkshire’s 15th largest holding. As a bonus, Citigroup shares boast a dividend yield of just under 4%.
3. Goldman Sachs
Shares of the legendary investment bank Goldman Sachs (GS 3.35%) don’t trade below book value, but they aren’t much more expensive at a price-to-book ratio of just 1.1. The shares are also cheap using the price-earnings ratio, giving the 153-year-old bank a price-earnings ratio of just 7.5. It all seems incredibly cheap for a top investment bank of Goldman’s size and stature, and well below the historical valuation it has typically enjoyed. Stocks are down because the tepid market of 2022 has not been an ideal environment for IPOs or M&A activity.
At some point, these markets will heat up again and Goldman will be in a prime position to benefit. In the meantime, it’s not as reliant on investment banking as it used to be – the company now offers a consumer banking business called Marcus which it says will be accretive to returns. Its shares are currently yielding 3% and it recently increased that dividend by 25% to $2.50 per share. Goldman isn’t a Buffett stock right now, but given its attractive valuation and market-leading position, I wouldn’t be surprised if it made it to his watch list.
It makes sense to add these stocks to a portfolio
Overall, the financials sector has many attractive stocks trading at attractive valuations, and these three stocks are simply too cheap to ignore. Trading below book value (or slightly above in the case of Goldman Sachs), they offer investors a nice margin of safety when investing in these high-quality companies, and all pay above-market dividends. , making them all sensible additions to investors’ portfolios.
Ally is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Michael Byrne has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Goldman Sachs. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.