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What are we looking for?

U.S.-listed financial companies with decent valuations and strong price performance.

We have seen a recent sector rotation into financial stocks. The Financial Select Sector SPDR Fund (XLF), which has had a year-to-date return of minus 4.9 per cent, has gained 15.5 per cent over the past month. That makes it the second-best performing sector ETF in that period, behind only the Energy Select Sector SPDR Fund (XLE).

The screen

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

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We begin by setting a minimum market capitalization threshold of US$15-billion to focus on the largest 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 effectively a company is 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-book ratio of 1.6 or less and a P/E ratio of 15 or less. The average P/E of the S&P 500 Diversified Financials and Banks sectors is 20.1 and 15.6, respectively.

Finally, we added a four-week price-performance requirement of 20 per cent or better in order to get the best-performing companies as indicated by upside price momentum.

We have also included dividend yield as well as year-to-date and one-year percentage 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 worldwide.

What we found

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

Surprisingly, four of the top 10 companies are headquartered in Canada, with dual listings here and in the United States: Manulife Financial Corp., Bank of Montreal, Bank of Nova Scotia and Toronto-Dominion Bank. TD has the highest market cap of all the Canadian names on our list at US$100-billion and has the highest return on equity in this group at 11.2 per cent.

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Topping our list is U.S. multinational investment bank Morgan Stanley, which has had the best one-year performance on our list at 31.1 per cent and the second-best four-week performance of 24.5 per cent. Morgan Stanley has not traded at its current level since November of 2007 as the stock continues to make new 52-week highs.

U.S. insurance company Aflac Inc. has the highest return on equity on our list at 14.9 per cent and the lowest P/E on our list at 7.1.

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.

Select U.S.-listed financial stocks

RankCompanyTickerMkt. Cap. (US$ Bil.) ROE (%)P/BP/E4W Perf. (%)YTD Perf. (%)1Y Perf. (%)Div. Yld. (%)Recent Price (US$)
1Morgan StanleyMS-N115.012.11.510.824.525.231.12.264.03
2Metlife Inc.MET-N42.97.90.67.822.3-6.4-2.03.947.61
3Manulife FinancialMFC-N33.710.90.98.523.1-14.3-9.14.922.63
4Goldman Sachs GS-N84.97.71.013.720.13.410.12.1236.94
5Bank of MontrealBMO-N48.99.41.313.020.6-2.80.34.375.60
6Bank of Nova ScotiaBNS-N62.411.01.312.619.3-9.3-8.95.451.56
7Aflac Inc.AFL-N31.814.91.07.124.0-14.3-13.42.945.35
8TD BankTD-N100.011.21.513.820.3-2.4-4.44.355.25
9State Street Corp.STT-N26.110.11.111.822.6-6.4-0.72.874.01
10Citigroup Inc.C-N118.86.10.711.235.9-28.4-22.93.657.10

Source: Trading Central         

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

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