Financial sector stocks have underperformed the broader market year to date, which may be a good reason to beef up bets in the sector.
The Financial Select Sector SPDR , a popular exchange-traded fund that tracks financial stocks, was down less than 7% year to date close to the end of trading Monday, versus a more than 4% gain for the Dow Jones Industrial Average.
Which financial stocks do the analysts like best? There is a ranking system to give you the answer.
Bloomberg assigns stocks a number from one to five based on each analyst's recommendation, then calculates the average to show how Wall Street analysts as a group rate a particular stock. A rating of five would mean every analyst that covers the stock loves it, while a rating of one means every analyst hates the stock.
TheStreet took a look at the 83 financial stocks in the S&P 500 to see how analysts rate them. Keep in mind that analysts may recommend a stock even if they think the company is badly run, has poor growth prospects, or a bunch of bad loans sitting on its books that it isn't owning up to, as long as it's cheap enough.
Also remember that analysts tend to be bullish as a group, mostly because they are afraid putting a "sell" on a stock may cause management to shut them out of the information loop.
Here are the five they like best. (And don't miss the financial stocks analysts hate.)
5. PNC Financial
Analyst consensus rating: 4.57
Pittsburgh-based PNC has one of the healthier balance sheets among U.S. banks, and had been widely expected to try to capitalize on the distressed environment in the banking industry to go out and make some acquisitions. Indeed, the bank surprised many industry observers Friday when it emerged as the winning bidder for the Royal Bank of Canada 's U.S. subsidiary, headquartered in Raleigh, N.C. Investors appeared not to like the deal much, driving down PNC shares by 2.82% on Friday.
4. ACE
Analyst consensus rating: 4.59
Noting ACE's anticipated 2011 return on equity of roughly 9.3%, compared to an average of about 7.6% for ACE's main competitors, Sandler O'Neill analyst Paul Newsome argues the stock should trade at a slightly higher valuation to peers. However, Newsome argued in a recent report following a meeting with the insurer's management that "it may take the stock market a while to recognize ACE's value."
According to Newsome ACE believes in the next five to seven years it can become more of a personal lines insurer primarily overseas, have a greater percentage of its business in Asia and Latin America and have a larger proportion in accident & health insurance. Newsome argues these initiatives ought to help ACE diversify its risks.
Newsome describes ACE as "one of the few truly global insurance operations in the world" noting it has with licenses in nearly every country. "Few insurers have primary insurance licenses around the world. ACE has customers in over 140 countries and jurisdictions," Newsome writes.
3. Visa
Analyst consensus rating: 4.61
Visa shares have outperformed the Dow and the Financial Sector Select SPDR, though with a gain of just 5% year to date, they have trailed other credit card companies like MasterCard , Discover Financial Services and American Express by a big margin.
A big reason is the so-called Durbin Amendment, part of the Dodd Frank financial reform bill, which will expose Visa to more competition by giving merchants the option of using other credit card networks on debit card transactions. Still, unlike banks, or even rivals like Amex and Discover, Visa has no credit exposure.
More important, people around the world are using plastic for more and more transactions all the time, though they still overwhelmingly use cash and checks. That's a big opportunity for Visa, and a big reason analysts love this name even as the financial sector continues to struggle.
2. Prudential Financial
Analyst consensus rating: 4.64
Prudential Financial is best known as a life insurer, though it has a wide range of businesses throughout the U.S., Asia, Europe and Latin America ranging from mutual funds to real estate brokerage.
Sterne Agee analyst John Nadel has a "buy" on Pru and a $75 price target versus its $59.77 price in late trading Monday. Nadel praises Prudential's capital strength, noting that even after it buys back $1.5 billion worth of shares over the next 12 months, a plan it announced earlier this month, it will have around $1 billion of "readily deployable," capital on hand for acquisitions or other uses should the need arise.
A couple of worries Nadel notes include tougher capital requirements as regulators worry about the insurance industry in the wake of the huge and largely unforeseen role AIG played in the financial crisis. Nadel also notes that Pru's management appeared "cautious" during a recent conference call when discussing the outlook for its 401k business.
1. JPMorgan Chase
Analyst consensus rating: 4.64
JPMorgan emerged from the crisis as arguably the strongest U.S. commercial bank. Its acquisition of Bear Stearns helped solidify its investment banking prowess, helping it pick up market share and expertise in underappreciated businesses like prime brokerage — providing back-office services to hedge funds--and energy trading. JPMorgan also became a retail powerhouse on the West Coast with its long-sought acquisition of Seattle-based Washington Mutual.
While the bank has fared far better in residential mortgage lending and servicing than Bank of America , it has certainly had its share of embarrassments, as recent management shakeups in those businesses appear to indicate.
Another worry for investors is who will succeed JPMorgan Chairman and CEO Jamie Dimon. Many observers have argued Dimon may be bored in his current job, having essentially "mastered" the industry. He is widely admired in the banking industry and has frequently been mentioned as the only banker who might have a shot at becoming U.S. Treasury Secretary even though public antipathy to Wall Street remains fierce.
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Disclosures:
TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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Disclosures:
TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.