Interactive Investor

Two standout shares I’d buy in this popular sector

26th April 2023 08:46

by Rodney Hobson from interactive investor

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Corporate America is pumping out first-quarter results at speed, but the numbers reflect varying degrees of success. Overseas investing expert Rodney Hobson names shares he likes and one to sell.

american dollar 600

Optimism sparked by a decent set of banking results to start the US quarterly reporting season was soon deflated by a disappointing follow-up set of figures. There are always winners and losers whatever the economic circumstances.

While rising interest rates helped JPMorgan Chase & Co (NYSE:JPM), Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC) in the first quarter of 2023, it was the lack of deal-making that hit top investment bank Morgan Stanley (NYSE:MS), which also took a knock from setting aside $234 million (£188 million) to cover bad loans.

Revenue was down at $14.5 billion, though only by 1.9%, so this was far from catastrophic. Even though net income slid 18% to just over $3 billion, analysts had feared worse. And while mergers and acquisitions were in short supply, causing revenue in the core investment banking arm to fall by 24%, at least wealth management offered shareholders a fair degree of solace with revenue up 11%. This division brought in $109.6 billion in net new assets, some from smaller banks suffering from a crisis of confidence after the failure of Silicon Valley Bank.

Life will continue to be tough in the second quarter, but Morgan Stanley should have little difficulty in coming through without too much pain until business starts to pick up in the second half. American companies are reported to be lining up bids for undervalued British stocks, which should certainly help.

Also banks tend to be sensibly overcautious at this stage of the economic cycle and put aside too much to cover debt defaults, so some of the first quarter provisions could well be written back in by year end.

The shares have made several attempts to break above $100 since recovering from the pandemic crash, but have sunk back to $88 where the price/earnings (PE) ratio is not too challenging at 15.5 and the yield is a decent 3.35%.

Morgan Stanley.PNG

Source: interactive investor. Past performance is not a guide to future performance.

It is much harder to feel optimism about The Goldman Sachs Group Inc (NYSE:GS), which has suffered the same problems as rivals without managing to find any silver linings. In contrast to its rivals, Goldman saw sales in its fixed income division tumble 17%.

Group revenue declined 5% to $12.2 billion in the quarter while net earnings slumped 19% to $3.1 billion. This has persuaded Goldman to reverse its previous policy of an aggressive move into mainstream banking. It has now sold off a chunk of its consumer loan book and the rest is up for sale. The GreenSky financial technology business bought for $2.24 billion just over a year ago is also to be disposed of, probably at a loss.

The shares are well down from a 12-month peak at $389 but may not find support at the current level around $340,where the PE ratio could be too demanding even at a below average 12.2, and the yield of 2.8% is insufficient compensation for the looming problems.

Goldman Sachs.PNG

Source: interactive investor. Past performance is not a guide to future performance.

At least Bank of America Corp (NYSE:BAC) put some colour back into investors’ cheeks despite announcing that it is to reduce its workforce by 2% by shedding 4,000 jobs rapidly.

Revenue rose 13% to $26.26 billion as its bond traders enjoyed their best quarter for a decade. A 16% rise in net income to $7.66 billion was the best performance among the major banks and BoA seems to have benefited more than most from the flight away from smaller rivals.

Bank of America.PNG

Source: interactive investor. Past performance is not a guide to future performance.

The shares have tumbled from $49 at the start of last year to only $29 now. That does not reflect the improved prospects.

Hobson’s choice: Buy Morgan Stanley below $99. The downside looks limited to $84. Sell Goldman Sachs. There is clearly better value in the sector and even $300 may not hold. Buy Bank of America up to $36.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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