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What are we looking for?

U.S.-listed financial companies indicating decent valuations and upward price momentum in an improving sector.

The Financial Select Sector SPDR Fund (XLF), a proxy for what is currently the best performing sector in the S&P 500, has gained 6.7 per cent over the past month and 32.3 per cent year to date. Momentum strategies have performed extremely well over the past year as equity markets continue to trend to new record highs. This week we look for opportunities in the outperforming U.S. financial sector.

The screen

We will be using Trading Central Strategy Builder to search for U.S.-listed financial companies with strong profitability, stock price performance, and better-than-average valuations.

We begin by setting a minimum market capitalization threshold of US$5-billion to focus on larger, more established companies in the sector. To find stocks with strong profitability for shareholders, we will screen based on return-on-equity ratios of 6 per cent or more. Return on equity measures how effective a company is at converting invested capital into income. Return on equity is a key metric in the banking industry.

To ensure we don’t overpay for our investments we will screen for companies with reasonable valuations based on a price-to-earnings ratio of 13 or less. The average P/Es of the S&P 500 Diversified Financials Index and S&P 500 Diversified Banks Index are 17.9 and 11.5, respectively.

Finally, to get the top performing stocks with upward price momentum, we added a four-week price-performance requirement of 5 per cent or better and the stock price must be within 10 days of its recent 52-week high.

We have also included dividend yield as well as year-to-date and one-year price return for your reference.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and around the world.

What we found

Our screener ranks the list based on all performance and revenue criteria.

Seeking U.S. financial companies with bullish price momentum

RankCompanyTickerMkt. Cap. (US$ Bil.) ROE (%)P/E4W Price Perf. (%)Days since New 52W HighDiv. Yld. (%)YTD Price Perf. (%)1Y Price Perf. (%)Recent Price (US$)
1Jefferies Financial GroupJEF-N9.115.96.611.602.749.5109.637.28
2Cincinnati Financial Corp.CINF-Q20.127.17.19.802.042.959.1124.68
3Goldman Sachs GroupGS-N139.322.97.510.401.956.799.4418.94
4Fidelity National FinancialFNF-N14.030.76.09.073.325.449.448.73
5Discover Financial ServicesDFS-N39.546.28.46.981.545.6155.8131.85
6Capital One Financial Corp.COF-N77.619.06.97.881.476.0162.4174.19
7Synchrony FinancialSYF-N29.326.69.28.981.748.1110.351.45
8Principal Financial GroupPFG-Q18.210.111.88.503.736.655.067.69
9First American FinancialFAF-N7.720.37.85.402.935.033.769.86
10American Int'l GroupAIG-N47.06.611.517.002.345.189.054.77
11Aflac Inc.AFL-N38.318.46.96.272.328.456.756.93
12Chubb Ltd.CB-N81.914.210.312.421.721.348.6186.25
13Travelers Cos. Inc.TRV-N40.613.510.910.702.215.843.2161.69
14UBS Group AGUBS-N59.113.18.35.182.220.337.316.90
15Selective Insurance GroupSIGI-Q5.117.012.07.021.225.545.383.89

Source: Trading Central

Topping our list is Jefferies Financial Group Inc., a diversified asset management company. Jeffries just posted a new 52-week high at the time of this writing to levels not seen since early 2011. The stock has a P/E of 6.6, which is below the average P/E of our entire screen – 8.8.

Credit-card issuer Discover Financial Services has the best return on equity on our list at 46.2 per cent. Card customers made fewer but larger purchases because of lockdowns; people headed out less often but when they did the average transactions were larger, according to Discover’s recent Debit Issuer Study. The stock price has remained above its 20-week moving average since September of last year, which indicates the stock is in an established uptrend. It has the second-best one-year performance on our list at 155.8 per cent.

Goldman Sachs Group Inc. made the list after reaching a new 52-week high this week. The stock has the best year-to-date performance on our list at 56.7 per cent.

Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 16.6-per-cent annualized total return compared with 15.4 per cent for the S&P 500.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Trading Central in Ottawa.

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