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All Contents © 2020The Kiplinger Washington Editors
By Maya Sasson, Contributing Writer
| January 13, 2020
Financial stocks are among the market sectors facing an extremely uncertain future in 2020.
Last year saw the sector pushed and pulled by factors including three Federal Reserve rate cuts, waffling on the U.S.-China trade deal and weak but eventually improving economic data from some of the world's largest economies. Financial stocks still managed a 29% gain amid the turmoil.
But 2019 might seem like a cakewalk compared to what's ahead. Low interest rates still are hampering commercial banks, and no one is quite sure what's in store from the Fed. Meanwhile, the U.S. and China have a much more difficult path to finish the job started by their "phase-one" trade deal, and the 2020 election cycle will have Wall Street guessing all year at whether bank stocks will enjoy another accommodative presidential term.
As a result, analysts' top picks in the financial sector aren't your usual "who's who" of big banks and insurers. While there are a couple of well-known consumer names, emerging fintech firms and smaller financial companies are catching the analyst community's eye.
Here, then, are the seven best financial stocks to buy for 2020. We've used the Stock Screener tool from TipRanks to narrow down the sector's most compelling investment opportunities, as seen by Wall Street's analysts. All of these stock picks are so overloaded with bullish opinions, in fact, that they boast a "Strong Buy" consensus rating. Take a look.
Data is as of Jan. 12
Market value: $430.6 billion
TipRanks consensus price target: $212.45 (10% upside potential)
TipRanks consensus rating: Strong Buy
Payment processor Visa (V, $193.77) – one of the original "fintech" stocks – has cemented its status as an industry powerhouse thanks to not only its sheer size but also its diversified product offerings. Visa has become a vital intermediary between buyers and sellers, and sports the largest retail electronic payments network in the world.
Compass Point analyst Michael Del Grosso initiated coverage of the payments industry in December. In his initial note, he writes that he expects industry-wide consolidation as well as further disruption in 2020. He also believes factors such as U.S. consumer health, continued integration of software and payments, the rise of mobile commerce and growth in cross-border payments stand should benefit the space as a whole.
Given this landscape, Del Grosso cites Visa as a standout. He rates the stock a Buy with a $215 price target, implying 11% upside over the next 12 months. He argues that its "unmatched" scale, as well as its position at the forefront of the credit market, will help it edge out its competitors.
Wells Fargo analyst Donald Fandetti (Overweight, equivalent of Buy) recently raised his price target on shares, from $200 to $213, writing that U.S. consumers and digital offerings will drive a "strong 2020" for V shares.
Eleven analysts have sounded off on the credit-card giant over the past three months, and every last one of them has delivered a Buy-equivalent rating. That makes Visa a clear "Strong Buy" financial stock. Get the full analyst consensus and price target breakdown.
Courtesy HimmelrichPR via Flickr
Market value: $5.6 billion
TipRanks consensus price target: $50.00 (21% upside potential)
OneMain Holdings (OMF, $41.30) is a financial services company that offers personal loans and insurance products under the OneMain Financial banner. This company ripped off a 74% gain in 2019, and while a red-hot run can dim analysts' expectations for future upside, Wall Street remains overwhelmingly bullish on this mid-cap stock.
Stephens analyst Vincent Caintic argues that the stock is undervalued despite its breakout 2019.
"Not only is there significant growth ahead, but more importantly, downside protection is strong both to fundamentals and to OMF shares," writes Caintic, who issued the note in November, but shares are trading roughly where they were back then. "No other company in our coverage is as cheap with as strong capital return. Further downside protection comes from (36-month) liquidity."
Caintic, who has an Overweight rating and $48 price target on shares, calls OMF his top pick among financial stocks.
Keefe Bruyette analyst Eric Hagen is one of just two analysts that have given OMF a Hold rating over the past three months, versus 10 buys. He still sees reason for optimism, however: Specifically, higher disposable income should improve credit performance for OneMain Holdings and other non-prime consumer lenders. Check out other analysts' price targets on TipRanks.
Market value: $2.1 billion
TipRanks consensus price target: $113.00 (22% upside potential)
Private online health insurance marketplace eHealth (EHTH, $92.63), which allows individuals and small businesses to compare insurance products, posted a massive 150% gain in 2019. But it certainly didn't come in a straight line: The company lost half its value in between stellar earnings reports in July and October, as investors worried about eHealth's churn.
That said, Wall Street's analysts have made some downright bombastic statements about this high-growth financial stock.
SunTrust's Tobey Sommer told investors in early September that EHTH's massive decline was a "significant opportunity" and said the company could quintuple its market cap – from $2 billion at the time to an eventual $10 billion – as it wins Medicare market share.
Cantor Fitzgerald's Steven Halper, meanwhile, said in October that it's "solid" results relieved some concern about churn, and reiterated an Overweight rating as well as a $120 price target (30% upside). RBC Capital's Frank Morgan concurred, saying that management "put to bed investor fears" over churn, and that 2020 could be another big year thanks to OneMain's "tendency to under-promise and over-deliver."
The aforementioned quarter saw revenues jump 72% year-over-year, helped out by a 75% surge in Medicare-segment revenue.
OMF has racked up five Buy ratings from the five analysts who have written about the stock over the past quarter. It hasn't absorbed a rating lower than Buy for at least nine months. Investors interested in learning more can check out additional EHTH analysis on TipRanks.
Market value: $1.1 billion
TipRanks consensus price target: $43.67 (23% upside potential)
Encore Capital Group (ECPG, $35.41) is a global finance company that specializes in buying debt from banks, credit unions and utility providers across four continents. ECPG pulled off a 50% gain in 2019 – about 20 percentage points better than the broader financial sector. And analysts believe ECPG will again be among the best financial stocks to buy in 2020.
The company's most recent quarter, announced in November, saw global revenues hit a record $356 million. That drove a record $1.64 in non-GAAP (generally accepted accounting principles) "Economic" earnings per share. U.S. portfolio purchases were up 41% year-over-year and were on track for a record year; we'll find out whether it hit that mark in February.
Keefe Bruyette analyst Eric Hagen (Buy) expressed his confidence in ECPG after the report, boosting his price target from $45 per share to $50 (41% upside). "Quite simply, we think if Encore can continue to grow earnings and accumulate capital by reducing leverage, that deserves to support the value of the equity right now,"
He adds the fact that Encore is "concentrating acquisitions in fresh charge-offs, combined with its strengthening capital position, should drive value for shareholders into next year."
Encore Capital Group isn't a terribly well-followed stock, with only three analysts issuing notes on ECPG over the past three months. Thus, information is limited, and price targets/earnings estimates can quickly shift with just one pro's change in opinion. Still, those three analysts are all bullish on the stock, and as a group, see 23% upside as possible across 2020. You can learn more about Wall Street's views on ECPG via TipRanks' consensus breakdown.
Market value: $4.2 billion
TipRanks consensus price target: $25.75 (25% upside potential)
Sterling Bancorp (STL, $20.65) is a mid-cap regional bank stock headquartered in Montebello, New York. Its principal subsidiary, Sterling National Bank, offers various financial services to business owners and consumers in the New York metro and Hudson Valley areas of the state.
And Wall Street's pros think the financial stock will put up a 2020 similar to last year, when it gained close to 28%.
"Conversations with management and investors reinforce our view that STL is a best-in-class company supported by strong organic and acquisitive growth and a diversified balance sheet offering optionality in various operating environments," writes RBC Capital's Steven Duong, who rates the stock Outperform with a $26 price target. That implies 26% price upside over the next 12 months.
Duong also points out that management might try to increase shareholder value via mergers and acquisitions (M&A). "Management highlighted that enough time had passed since the Astoria deal for regulators to be comfortable with STL pursuing another deal," he writes. "The company looks to do 1-2 portfolio acquisitions a year and is open to 'fill-in' acquisitions of $5-$10 billion in assets, as well as (mergers of equals) that make sense."
Lastly, Duong writes that Sterling's diverse funding channels – including traditional retail, commercial teams, its municipal bank and its online consumer direct bank, BrioDirect – give the company "optionality to manage its balance sheet in different economic, credit, and interest rate environments."
STL doesn't have a large analyst following given its size and regional scope. Still, of the six analysts sounding off over the past quarter, five have called the stock a Buy. Investors interested in learning more can read additional STL analysis on TipRanks.
Market value: $1.8 billion
TipRanks consensus price target: $37.00 (25% upside potential)
Axos Financial (AX, $29.57) is the force behind Axos Bank, a nationwide digital bank offering consumer and business banking solutions.
This tech-forward financial-sector company is a rare 2019 underperformer on this list, with AX shares gaining 20% last year versus roughly 29% for the sector. But it has racked up four Buys versus no Holds or Sells over the past three months, including a nod of approval from Wedbush.
Analyst David Chiaverini sees Axos as a leader among digital banking players, arguing that it's "pioneering the development of a fully integrated 'universal digital bank' (UDB)," which was formed through internal development as well as its WiseBanyan acquisition. "The culmination of Axos slowing the pace of investment to build its universal digital bank combined with several acquisitions in 2018 that are ramping up (Axos Invest, Axos Clearing, and Axos Fiduciary Services) should lead to positive operating leverage and efficiency gains over the next couple years," he writes.
Several new initiatives are expected to drive further growth in 2020 and 2021. Chiaverini points to the Axos Invest integration with UDB, which will occur over the next few quarters, as potentially sparking new cross-selling opportunities in the loan and deposit segments. Chiaverini rates the bank stock Outperform and gives it a $35 price target.
Riley FBR's Steve Moss provided a bullish outlook in November, saying that he's impressed with Axos' plan to build the bank via technology. He reiterated his Buy rating and ratcheted his price target up to $39 per share, from $33. See what other pros have to say about AX.
Market value: $4.8 billion
TipRanks consensus price target: $17.63 (27% upside potential)
MGIC Investment (MTG, $13.89) plays an essential role in the residential mortgage finance system by offering products and services that protect mortgage investors from credit losses.
While MTG shares have underperformed its sector peers on average over the past decade, it shined in 2019, and analysts think it will be one of the best financial stocks to buy in 2020.
Deutsche Bank's Phil Stefano writes that operating statistics demonstrate impressive growth in "insurance in force" (IIF, or when insurance policies are active and paid for). The data also indicated that new defaults had decreased in two of the past three months from Stefano's November note, even while sector defaults are ticking higher.
"November results indicate better IIF growth than we had been previously anticipating," writes Stefano, who reiterated a Buy rating and $18.50 price target. "Our long-term expectations for the sector remain and we forecast MGIC will deliver low-to-mid-teens operating returns and book value growth given the solid outlook for the (mortgage insurance) market," he explains.
Riley FBR analyst Randy Binner (Buy), meanwhile, says he believes that MTG shares are almost done consolidating their recent gains. He raised his price target to $19, writing that "reward-to-risk is favorable, at 2 to 1 in our valuation analysis." Check out other analysts' price targets on TipRanks.
Maya Sasson is a content writer at TipRanks, a comprehensive investing platform that tracks more than 5,000 Wall Street analysts as well as hedge funds and insiders. You can find more of their stock insights here.