Earlier this month, the January jobs numbers came in unexpectedly strong. In accordance with the BLS report, 353,000 latest positions were created throughout the month, surpassing forecasts by over 80%. This impressive performance adds one other piece of economic good news to the pile.
That pile already incorporates a moderating trend in inflation, since the rate of price increases continues to decelerate, and a continually increasing belief that the Federal Reserve will act to pare back rates of interest later this 12 months. Altogether, it’s been enough to take care of economists blissful and boost investor sentiment.
For Morgan Stanley analyst Betsy Graseck, these features open up a series of opportunities, especially in financial stocks. Regarding two particular names, Graseck suggests that it’s ‘time to hit buy.’
We’ve opened up the TipRanks database to guage Wall Street’s opinion on Graseck’s picks. Let’s take a more in-depth look.
Discover Financial Services (DFS)
The first stock we’ll take a have a look at is Discover Financial Services, best known as the issuer and backer of the Discover Card. This was the first bank card to return with a ‘a refund’ reward; it’s possible you’ll remember its early TV commercials featuring the slogan ‘It pays to Discover…’ Together with the a refund reward on all purchases, the Discover card had no annual fees for the cardholder. These perks for the purchasers helped push Discover Financial to a successful launch following the cardboard’s 1985 introduction, and today the company has a $27 billion market cap and is taken into account certainly one of the established bank card firms.
Together with the several versions of the Discover card on offer, Discover Financial Services also makes available a wide-ranging set of monetary and banking services. Customers can access checking, savings, and retirement accounts, and take out personal, home, or student loans. The company describes its mission as helping its customers spend smarter, manage debt higher, and save more.
While Discover has a sound area of interest in the customer credit market, the financial results for 4Q23 were considered disappointing. Specifically, the company’s $1.54 EPS was 93 cents per share below the forecast, and the company reported provisions for $1.91 billion in credit loss. The credit loss provision, essentially a company projection of future ‘bad loan’ damage, was well above the $1.66 billion that had been expected – and almost double the $883 million from 4Q22.
On a positive note, Discover’s revenue was solid. The company’s top line of $4.2 billion was up almost 13% year-over-year and came in $90 million above the forecasts.
Also seen as a positive for the company, Discover announced in December the appointment of Michael Rhodes because the brand recent CEO. The company had been under interim leadership since August of last 12 months, and the announcement was viewed as a shift toward stability. Rhodes’ appointment is likely to be effective no later than March 6.
Looking ahead, Morgan Stanley’s Graseck acknowledges some challenges but sees potential as consumer delinquency slows down.
“As consumer delinquency formation slows, we prefer exposure to stocks further down the credit spectrum or with recent credit underperformance vs peers. DFS’s credit performance has lagged peers over the past few quarters, with card DQ & NCO rates now 48%/43% above 2019 vs peers at 9%/12%. But in our view, DQ formation at DFS is starting to show the corner, and can lag the advance COF has already been seeing for several months,” Graseck opined.
Graseck sees reasons for optimism, and says of Discover, “Further, the near-term catalyst path is more compelling to us at DFS: a contemporary CEO is in place as of last week, and we should always at all times be gaining further clarity into the likely sale of the $10bn student loan portfolio by 1H24, which should help drive a return to share repurchases post stress test ends in June.”
These comments back up the analyst’s upgrade of DFS from Equal-weight (i.e. neutral) to Obese (i.e. Buy) and her $133 price goal suggests a one-year upside potential of twenty-two%. (To take a look at Graseck’s track record, click here)
Overall, DFS’ Moderate Buy consensus rating comes for a near-even split throughout the 19 recent analyst reviews: 9 to Buy, 10 to Hold. The shares are trading for $110.50 and the $116.94 average goal price indicates room for a modest 6% increase this 12 months. (See Discover’s stock forecast)
Ally Financial (ALLY)
The second stock on our list of Morgan Stanley financial picks is Ally Financial, a Detroit-based bank holding company offering an enormous choice of monetary services to its customers. These include online banking, corporate lending, and mortgage loans. Until 2010, the company was known as GMAC, or General Motors Acceptance Corporation, and was the financing arm of the GM auto company. Ally retains a link to its automotive origins, offering automobile financing and vehicle insurance policies, and is taken into account certainly one of the nation’s largest auto financers.
Last month, Ally entered into an agreement with Synchrony Financial, under which Ally will sell its point of sale (POS) financing business to Synchrony. The transaction will even include $2.2 billion in loan receivables, and is anticipated to shut during 1Q24.
Also during January, Ally reported its 4Q23 results, and beat the forecast on revenues while matching expectations on earnings. The very best line, at greater than $2 billion, was $72 million higher than had been anticipated, while the 45-cent non-GAAP EPS was in-line with expectations. The company also saw notable gains in net financing revenue and net interest margin.
In a single other positive note, for return-minded investors, Ally declared its dividend at 30 cents per common share. The dividend, to be paid on February 15, annualizes to $1.20 per share and provides a yield of three.3%.
Morgan Stanley’s Graseck will likely be upbeat about ALLY, seeing its business model as a bonus given changes throughout the credit market. Graseck says of the stock, “ALLY is the right technique to play lower rates in our coverage, given its exposure to slower moving loan yields (74% of loans are in fixed-rate loans, largely auto) and faster-moving funding costs (~90% of funding is in deposits, 63% of which can be in OSA, checking accounts, and MMA). Yes, market expectations for rate cuts over the near term have somewhat moderated recently, but are still in line with our model assumptions: 4 cuts in 2024 and a pair of in 2025.”
The comments above lead into some solid forecasts for the near- and mid-term: “We’re forecasting a 27% increase in quarterly NIM by YE25, from 3.20% in 4Q23 to 4.00%/4.07% in 3Q/4Q25e. This, in turn, drives an expected 39% EPS CAGR over 2023-25e, highest in our Consumer Finance coverage (median 10% throughout the group.”
All in all, that’s one other stock that gets an upgrade from Graseck, from Equal-weight (i.e. neutral) to Obese (i.e. Buy). Her price goal is now set at $47, and implies that ALLY shares will gain ~27% over the next 12 months. (To take a look at Graseck’s track record, click here)
Over again, we’re taking a have a look at a stock with a Moderate Buy consensus rating. ALLY shares have 18 reviews on file, including a wonderful split – 8 each – in Buys and Holds plus 2 to Sell. The stock’s current trading price is $37.03 and its $41.12 average price goal suggests that a 11% gain is waiting throughout the wings. (See Ally’s stock forecast)
To hunt down good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed on this text are solely those of the featured analyst. The content is supposed to be used for informational purposes only. It’s reasonably essential to do your individual evaluation before making any investment.