Financial stocks are feeling the heat these days. Higher-than-expected inflation is pushing the Federal Reserve to raise interest rates sooner than expected, raising fears of a recession.
As the market hates uncertainty and looks to the future, several financial and fintech stocks quickly corrected, as if a recession was already here. But it is not a certainty that this will happen.
While it may seem prudent to wait for a recession to emerge, the market is often ahead of economic results. For long-term investors, the following battered financial stocks seem like real bargains, making them buys today, even amid scary headlines.
As a fintech stock, PayPal (PYPL -0.10% ) has the worst of both worlds in today’s environment. Indeed, fintech stocks trade at higher multiples than banks, but are also sensitive to consumer spending. So a slowdown caused by higher rates hits PayPal not only on valuation, but also on potential growth. It recently released disappointing guidance in its fourth quarter earnings report, appearing to confirm those fears.
Still, there are reasons to think the hate may have gone too far. PayPal downgraded the trade to just 23 times this year’s free cash flow forecast of $6 billion, which is a low multi-year valuation for the stock. At the same time, its results are currently suffering from a faster-than-expected trickle down of revenue from eBay (NASDAQ:EBAY)which was the parent company and exclusive partner of PayPal, but is moving to a new processor, while retaining PayPal as the payment option for buyers.
The good news? eBay’s declines should be complete by the middle of this year. Once they end, revenue should accelerate in the second half.
Because PayPal takes a percentage of every transaction going through its platform, it will in some ways benefit from higher prices, potentially offsetting lower economic activity. And coming this year, a “Pay with Venmo” button will be available on Amazongiving PayPal a new avenue for potential growth.
While not without risk, PayPal may have fallen too far, down more than 60% from its highs.
2. Bank of America
Although higher long-term rates should benefit Bank of America (BAC -1.32% ), a recession would certainly not be. Perhaps that’s why Bank of America shares are down about 8% this year, despite a setup that should see it earn more net interest income from loans and mortgages. Amid the sell-off, it trades at just 11.2 times earnings, making this big bank a solid value stock.
Of course, a declining stock market has the potential to reduce the bank’s wealth management revenue, and a barren market for initial public offerings has the potential to reduce investment banking fees. Yet among the major US monetary central banks, Bank of America is among the most exposed to traditional loans, which should benefit from higher rates.
But one might ask, “What about the inverted yield curve? While higher short-term rates could weigh on Bank of America’s costs of funds, the bank also has a huge amount of low-cost consumer and commercial deposits. Last quarter, these deposits reached $2.1 trillion, compared to just $979 billion in loans and leases. Due to its national footprint and better digital tools, these deposits will likely stay in place, allowing Bank of America to pay very low funding rates compared to competitors, even as short-term interest rates rise. .
Meanwhile, CEO Brian Moynihan has pursued a strategy of “responsible growth” since taking the reins of the bank in 2010. This conservative attitude, coupled with a conservative CET1 ratio of 10.6% on the balance sheet, should be a comfort in times of economic stress. . A safe bank with an increasing yield of 2.1% and a low price/earnings (P/E) ratio is certainly buyable, even in today’s pessimistic market.
3. Lending Club
Speaking of low P/E ratios, the stock of loan club ( CL -1.62% ) has gone from high-flying fintech disruptor to being priced even cheaper than large-cap banks like Bank of America! After a sharp sell-off, LendingClub is trading at just 11 times this year’s earnings estimates. Not too expensive for a company that is expected to grow revenue by 40% and net profit by around 650% this year, based on median forecasts for 2022.
Obviously, investors are concerned about the security of LendingClub loans, which are mostly unsecured personal loans. But the company has changed and de-risked its business model over the past few years.
In 2021, management targeted Prime customers with FICO scores above 700, as management expected last year’s good credit conditions to normalize. Meanwhile, LendingClub’s delinquencies on loans made before the pandemic are lower than the industry.
Additionally, LendingClub is no longer as dependent on outside funding for loans as before. The company acquired Radius Bank last year, giving it a low-cost banking license and customer deposits. This gives LendingClub the ability to retain more loans itself and have more control over its own destiny.
But there are reasons to think that outside investors, like banks and fund managers, might still want to buy LendingClub’s loans. Its three- and five-year personal loans are short-term assets, meaning investors are repaid fairly quickly. In 2021, the average loan term was only 16.4 months and the average yield was 12.2%. That’s a lot more than what short-term treasury bills or corporate bonds offer investors.
Although investing in a lender may now seem dangerous, LendingClub’s new business model carries less risk than investors think. It looks like another bargain amid the rubble of the fintech space.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.