Admittedly, the financial stocks sector may seem like a dubious investment choice at the moment, given the potential forthcoming interest rate cuts, a rise in loan delinquencies, and a general sense of economic stagnation. However, within this turbulent landscape, there are several financial companies that have become curiously undervalued. These undervalued stocks warrant the attention of astute investors willing to withstand their inherent volatility. Let’s evaluate three solid options for potential investment in this realm.
1. The Unconventional Ally Financial
Ally Financial (NYSE: ALLY), an online-only bank, offers a comprehensive range of traditional banking services such as checking and savings accounts, credit cards, investments, and various loans. The majority of its revenue is derived from the lending business, predominantly in auto financing. The company’s strong performance in 2021 and 2023, driven by high demand for new cars, has been overshadowed by the current decline in new vehicle demand and an increase in loan delinquencies. Despite these challenges, positive economic indicators, including robust GDP and job growth, bode well for Ally Financial. Moreover, its shares appeared undervalued at just 11 times this year’s estimated earnings.
2. The Nimble U.S. Bancorp
U.S. Bancorp (NYSE: USB) operates a network of over 2,000 brick-and-mortar branches, distinguishing it from Ally Financial. Despite being smaller in size compared to its major competitors, U.S. Bancorp has demonstrated agility in the market, particularly through its lucrative payment services arm, which contributed significantly to last year’s non-interest income. Trading at a mere 10 times this year’s anticipated earnings and offering a dividend yield of just under 5%, U.S. Bancorp also boasts a history of prudent and conservative financial management.
3. Ares Capital: Embracing High Yield with Caution
Ares Capital (NASDAQ: ARCC) stands out with a dividend yield as high as 9.5% and shares priced at less than 9 times their trailing and forward-looking profits. As a business development company (BDC), Ares Capital specializes in funding smaller enterprises that seek alternatives to traditional bank loans. While the past few years have been challenging, a gradual return to normal interest rates and signs of economic recovery position Ares Capital as a potential addition to portfolios.
Despite its compelling numbers, Ares Capital isn’t a conventional stock, and thus may not suit all investors. However, considering its low price, substantial dividend, and the slow but steady economic recovery on the horizon, it certainly offers an intriguing investment opportunity.
*Stock Advisor returns as of February 12, 2024
