7 best financial stocks for the rest of 2021

Financial stocks have done well in 2021 amid a strong economic recovery. Here are seven top sector picks for the remainder of the year.

  • By Brock Ladenheim,
  • Kiplinger
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Financial stocks come in all different shapes and sizes, and some may provide more upside or act as a better pick for a portfolio than others.

Current tailwinds for financial stocks include the wave of one of the best economic recoveries in U.S. history, with surging consumer spending aided by massive amounts of liquidity and low interest rates.

The Federal Reserve has reaffirmed its stance regarding interest rates time and time again over the last year, and at the moment, the central bank does not intend to raise them any sooner than the end of fiscal year 2023.

And while banks typically benefit from a higher interest-rate environment, the Fed's easy money policy during the pandemic has created an environment wherein financial stocks have been able to bounce back from their COVID-19 lows from March 2020, with many trading at or near all-time-highs.

Furthermore, the largest financial stocks are traditionally stable in regard to share price, providing a relatively safe space for storing wealth and potentially generating dividend payments as time passes.

As we move into the second half of 2021 – and with another earnings season soon underway – this is an opportune time to reevaluate some financial stocks.

Here are seven of the best financial stocks for the rest of 2021, according to the pros. Using TipRanks' database, we've found the most compelling plays in the space, according to the most up-to-date breakdowns from Wall Street's analysts.

Data is as of July 8. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks listed in reverse order of potential 12-month upside as implied by analysts' consensus price target.

Visa

  • Market value: $520.6 billion
  • Dividend yield: 0.5%
  • TipRanks consensus price target: $269.16 (13.8% upside potential)
  • TipRanks consensus rating: Strong Buy

Visa (V) is one of the world's largest digital transaction processing companies and it has benefited from surging consumer trends. As more money flows into the pockets of consumers and more goods or services are purchased, Visa stands to profit.

Among financial stocks, Visa has historically been a stable one to buy into. It is currently trading near its all-time closing high of $240 from July 7.

Dan Dolev of Mizuho Securities says the volume of payments from Visa's U.S. consumers could "accelerate nicely" in the third quarter of FY21, and that this development would be positive for the entire domestic transaction processing industry.

Visa's also looking to expand its presence overseas. On June 24, the company announced that it will acquire Swedish open banking platform Tink.

Tink allows "financial institutions, fintechs and merchants to build tailored financial management tools, products and services for European consumers and businesses based on their financial data," says Baird analyst David Koning.

He adds that the platform has been implemented into thousands of financial institutions, with a reach of more than 250 million European customers, and that the acquisition will "help Visa accelerate the adoption of open banking across Europe."

Both analysts rate the stock a Buy, indicating they expect it to outperform the S&P 500 (.SPX) over the next 12 months.

Charles Schwab

  • Market value: $128.2 billion
  • Dividend yield: 1.0%
  • TipRanks consensus price target: $81.42 (19.8% upside potential)
  • TipRanks consensus rating: Moderate Buy

The stock price of multinational financial services Charles Schwab (SCHW) has more than doubled in the past 12 months, due in part to the boost the U.S. economy got from the stimulus bill injections. Just like much of the stock market, Schwab is expected to continue benefiting from the easy money policies currently in place.

However, this does leave room for the risk of shifts in monetary policy. A pullback from the free-flowing liquidity would directly impact Schwab – as well as the other financial stocks featured here – although this is not expected for at least another year and a half.

Charles Schwab recently entered the news cycle when it responded to a Securities and Exchange Commission (SEC) probe. "The investigation concerns historical disclosures related to the Schwab Intelligent Portfolios (SIP) as the main portion of its digital advisory solutions, which had nearly $64 billion in assets as of March 31," says Brian Bedell of Deutsche Bank.

The SEC charge stems from a compliance examination, and Bedell adds that Schwab's second-quarter results will include a $200 million liability and non-deductible charge, "which may differ due to the outcome of the investigation."

The four-star analyst remains bullish on the company. Bedell argues that he would use "any weakness in the stock … as a buying opportunity," as long as there aren't any serious unexpected slowdowns in the economy.

He maintains a Buy rating on SCHW, and declared a price target of $91, reflecting a potential 12-month upside of 34%.

Focus Financial Partners

  • Market value: $3.7 billion
  • Dividend yield: N/A
  • TipRanks consensus price target: $61 (20.8% potential upside)
  • TipRanks consensus rating: Strong Buy

Focus Financial Partners (FOCS) is a financial firm that invests in Registered Investment Advisors, or RIAs. And FOCS is on the radar to potentially outperform the S&P 500 over the next twelve months.

Raymond James analyst Patrick O'Shaughnessy recently detailed his bullish standpoint on the financial stock. "Market appreciation and updated margin guidance drive our estimates higher in 2021 and beyond, and with Focus's leverage trending towards the low end of its targeted range … we could see an acceleration in acquisition activity," he says.

The five-star analyst asserts that the risk/reward calculation on the company makes it an interesting financial stock to add to a portfolio. He highlights acquisitions that are expected to be lucrative for Focus, such as two partner firm mergers in Q2, which will provide about $7 million in organic growth.

O'Shaughnessy adds that Focus's flexibility in navigating an atmosphere of partner firm mergers will allow its management to raise its EBITDA (earnings before interest, taxes, depreciation, and amortization) margin guidance for the second half of 2021.

He raised his price target from $59 to $60, indicating a potential 12-month upside of 18.8%. O'Shaughnessy rates the stock a Buy.

Willis Towers Watson

  • Market value: $29.4 billion
  • Dividend yield: 1.2%
  • TipRanks consensus price target: $275.17 (22.8% upside potential)
  • TipRanks consensus rating: Moderate Buy

Willis Towers Watson (WLTW) took a hit in mid-June, when the U.S. Department of Justice (DOJ) sued the insurance brokerage giant for a possible anticompetitive merger with Aon (AON). This $33 billion deal would have created a massive financial entity, and the DOJ has alleged the combination of the two firms will lead to higher prices and lowered competition.

Charles Peters of Raymond James said he does believe a deal to be possible. However, he has laid out contingencies if it does not take place, including WLWT using termination fee proceeds to "initiate a restructuring/retention plan and share repurchases of up to $2 billion," which could benefit the share price in the long term.

Despite the DOJ's hardline stance against the merger between the two financial companies, there are precedents of settlements from similar cases. Peters highlights the 2013 saga between Anheuser-Busch InBev (BUD) and Grupo Modelo deal, wherein the DOJ had sued on antitrust grounds, and just months later the three entities arrived at a settlement.

Future news on the matter in the next few months will surely influence Willis Towers Watson's share price in either direction, but Peters believes it will rise.

The five-star analyst rates the stock a Strong Buy, and, although he does not provide a price target, he notes that "WLTW's longer term intrinsic value could approach $300 per share."

Synovus Financial

  • Market value: $6.3 billion
  • Dividend yield: 3.1%
  • TipRanks consensus price target: $53.44 (26.8% potential upside)
  • TipRanks consensus rating: Strong Buy

If you're driving through the Southeast, you might just come across a Synovus Financial (SNV) bank branch.

The Georgia-based financial institution is well-liked on Wall Street, with Raymond James analyst Michael Rose recently reiterating his Buy rating. Rose detailed the company's exceptional Q1 earnings, commending SNV for its expense controls and core fee income.

While the financial firm maintained its outlook for the rest of 2021 following its first-quarter earnings report, Rose cautioned that a loss in fee-line momentum could negatively impact SNV's adjusted revenue guidance.

Nevertheless, the four-star analyst notes that SNV's growth currently exceeds its share price. "Net-net, we continue to view risk-reward positively given its relatively strong projected profitability, accelerating loan growth prospects, and benign credit profile juxtaposed with its discounted valuation versus peers," he says.

Signature Bank

  • Market value: $13.9 billion
  • Dividend yield: 0.9%
  • TipRanks consensus price target: $307.93 (28.2% potential upside)
  • TipRanks consensus rating: Strong Buy

One of the financial stocks on this list that has seen explosive growth since November 2020 is Signature Bank (SBNY), which is up more than 200% in the last eight months.

"The bank maintains one of the best growth profiles in banking," says David Long of Raymond James, who is bullish on the stock.

Long maintains a Strong Buy rating and recently raised his price target from $300 to $315, now indicating potential 12-month upside of 31%.

The analyst elaborates that his expectations were raised by Signature's "impressive intra-quarter balance sheet growth," and that the bank is poised for strong post-pandemic prosperity. He was quick to state that the share price is undervalued and the stock is a strong pick in relation to its competition.

In mid-June, Signature raised guidance regarding loans from its May forecast, and Long says management is expecting a full 50% more in growth ($3 billion vs. $2 billion) than initially expected for the upcoming Q2 earnings release. It also sees securities growth to exceed $3 billion in the second quarter, above the previous outlook for growth of $2 billion to $3 billion.

"The bank has a history of finding attractive industries/ecosystems that have robust deposit needs, and serving these areas well," Long adds. "Its unique operating model of acquiring experienced private client teams has driven strong deposit and loan growth, while the autonomy provided to the teams has helped keep overhead costs low, resulting in one of the lowest efficiency ratios in the industry."

Merchants Bancorp

  • Market value: $1.1 billion
  • Dividend yield: 0.9%
  • TipRanks consensus price target: $54.00 (42.1% upside potential)
  • TipRanks consensus rating: Moderate Buy

Merchants Bancorp (MBIN) turned in a beat on its first-quarter earnings report in early May, driven by improved multifamily finance loan growth and risk-averse lending strategies. The firm also benefited from secure net interest margins and a decent increase in fee incomes.

Daniel Tamayo of Raymond James explains that although there was a decline in residential mortgages as a result of cyclical and volatile markets, the core multifamily business brought the firm back to profitability. He's also optimistic about MBIN's credit quality outlook, and expects the bank to move into new markets and see growth in gain on sale revenues.

As such, Tamayo raised its 2021 earnings per share estimates for MBIN by 12% to $6.71. The four-star analyst argues that Merchants Bancorp's share price is undervalued due to its "strong growth, above-peer profitability metrics, and below-peer credit risk." He adds that the bank's balance sheets are strong and that it has an exceptional quality of credit.

Tamayo rates MBIN stock a Strong Buy, and has a price target of $57, suggesting potential 12-month upside of 50%.

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© 2021 The Kiplinger Washington Editors, Inc.
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