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Why Analysts Are Bullish on Diversified Financial Services Stocks

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Dec. 4 2020, Updated 10:52 a.m. ET

Analysts’ recommendations

286 analysts cover the 15 stocks in the diversified financial services subgroup of the Financial Select Sector SPDR ETF (XLF). Of these, there are 165 “buy” ratings, 15 “sell” ratings, and 106 “hold” ratings. Wall Street (SPY) analysts are most upbeat about Discover Financial Services (DFS), as it has received “buy” ratings from 23 analysts out of 29 covering the stock. The stock has received no “sell” ratings and has been rated “hold” by six analysts.

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In contrast, analysts are most negative about the performance of American Express, as the stock has received the highest number of “sell” ratings. Out of the 35 analysts covering the stock, six believe the stock should be sold. However, Franklin Resources has received the least amount of “buy” ratings from analysts. Of the 19 analysts covering the stock, two have rated it a “buy,” two have rated it a “sell,” and 15 have rated it a “hold.”

Valuations

Diversified financial services companies are trading at an average trailing-12-month (or TTM) price-to-earnings multiple of 19.8x and a one-year forward price to earnings of 13.7x.

Navient is the most undervalued stock with a one-year forward PE of 6.2x while Schwab Group with a one-year forward PE of 23.7x is most overvalued. Navient is down ~43% year-to-date while Schwab has gained 5% during the year.

Relative strength index

On an average, the diversified financial services subgroup has a 14-day relative strength index (or RSI) of 35. Navient and E*TRADE Financial, with RSIs of 54 and 43, respectively, are the furthest from oversold territory. Meanwhile, Franklin Resources (BEN) and Affiliated Managers Group (AMG) with RSIs of 26 are oversold.

RSI is a technical momentum indicator used to determine overbought or oversold conditions. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and is likely to become undervalued.

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