Market Overview

Four Fed-Approved Financial Stocks With The Most Upside Potential

Four Fed-Approved Financial Stocks With The Most Upside Potential

Discover Financial Services (NYSE: DFS), Goldman Sachs (NYSE: GS), J.P. Morgan Chase (NYSE: JPM) and State Street (NYSE: STT) not only passed the latest Fed stress test, but analysts see some headroom for the shares.

The Federal Reserve announced the results of the latest so-called stress tests on the big banks and financial institutions last week. It would seem to be positive news that the capital plans of 25 of the 30 companies participating in the Comprehensive Capital Analysis and Review were approved, meaning that by and large the banks are healthy.

However, investors didn't seem impressed, as the share prices of many of these companies ended the week lower than where they started it. And there was no slew of upgrades from analysts.

The mean price targets on many of the companies that passed the stress test suggest analysts see little upside potential in the sector overall. The implied potential upside in American Express, Bank of America, U.S. Bancorp and others is less than five percent. Bank of New York Mellon, Keycorp and Wells Fargo have little or no upside, while Comerica and Northern Trust are overvalued.

Here is a quick look at how the four stocks in this group with the most upside potential have fared and what analysts expect from them.

See also: Citigroup Tumbles on Fed Rejection - Analyst Blog

Discover Financial Services

After passing the most recent Federal Reserve stress test, this credit services company said it will seek approval to increase its dividend and buy back shares. Its market capitalization is about $27 billion, and it offers a dividend yield of about 1.4 percent. Its return on equity is more than 24 percent.

Of the 26 analysts polled by Thomson/First Call, all but five recommend buying shares, with 11 of them rating the stock at Strong Buy. The mean price target, or where analysts expect the share price to go, is about nine percent higher than the current share price. That target would be a new mutiyear high.

The share price ended Friday down fractionally from the start of the week, and it is less than four percent higher year to date. The stock is up more than 750 percent in the past five years. It narrowly outperformed MasterCard and Visa over the past six months. It also outperformed the S&P 500 in that time.

Goldman Sachs

Last week, a judge ruled that this investment banking giant must face a lawsuit over mortgage securities from 2007. The New York-based company sports a market cap of more than $75 billion and offers a dividend yield near 1.4 percent. Its price-to-earnings (P/E) ratio is less than the industry average.

For at least three months, the consensus recommendation of analyst has been to hold shares of Goldman Sachs. But analysts do see headroom for shares, as their mean price target is almost nine percent higher than the current share price. Note that shares traded higher than that as recently as January.

Shares retreated more than two percent in the past week, and the stock is down more than eight percent year to date. The 50-day and 200-day moving averages appear to be headed for a death cross. Over the past six months, the stock has underperformed competitors J.P. Morgan and Morgan Stanley.

J.P. Morgan Chase

In the wake of the stress test, this New York-based bank also said that it aims to increase its quarterly dividend and its share repurchase program. The company has a market cap of more than $13 billion. Its dividend yield is near 2.7 percent, and its P/E ratio is less than the industry average.

Eleven of the 36 analysts surveyed rate the stock at Strong Buy, while another 15 also recommend buying shares. They see more than eight percent upside potential, relative to the current share price. Shares have not traded at that level since March of 2000, and then only briefly.

Shares pulled back less than two percent late last week . The share price is about three percent higher than at the beginning of the year and well above the 50-day moving average. Over the past six months, the stock has outperformed Citigroup and the broader markets, but it underperformed Bank of America.

See also: J.P. Morgan Announces Buyback Plan, Dividend Raise

State Street

This asset manager announced a $1.7 billion share buyback plan last week. The Boston-based company has a market cap of more than $29 billion and a dividend yield around 1.5 percent. Its P/E ratio is less than the industry average, and its long-term earnings per share (EPS) growth forecast is about six percent.

Ten of the 21 analysts surveyed recommend buying shares, with nine others rating the stock at Hold. A move to the analysts' mean price target would represent a more than 11 percent gain for shareholders. The street-high price target is more than 24 percent higher than the current share price.

The share price is down more than five percent year to date, after pulling back a bit last week. And note that the 50-day and 200-day moving averages recently formed a death cross. The stock has underperformed competitors Bank of New York Mellon and Northern Trust over the past six months.

At the time of this writing, the author had no position in the mentioned equities.

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