Financial stocks are under a lot of pressure right now, and understandably so after the collapse of Silicon Valley Bank, which put investors on edge.
However, many of the financial stocks that got caught up in the sell-off have little in common with Silicon Valley Bank, and many are starting to look downright attractive from a valuation perspective after the sector-wide sell-off.
One way to play a rebound in these bank stocks and financials, in general, is through the Financial Select Sector SPDR Fund ETF (NYSEARCA:XLF) from State Street Global Advisors.
Not All Financial Stocks are Silicon Valley Bank
At a recent price of $31.17, XLF is now hovering just above its 52-week low. But if you delve into XLF’s top holdings, most aren’t all that affected by SVB’s demise or the trouble at a handful of other regional banks.
For one thing, Berkshire Hathaway makes up over 15% of the fund. This is Warren Buffett’s financial powerhouse that owns GEICO, Burlington Northern Santa Fe Railroad, and Berkshire Hathaway Energy, among many other subsidiaries, not to mention an enormous equity portfolio with ~$300 billion in U.S. equities as of last quarter.
Given Warren Buffett’s history of dealmaking with banks, Berkshire Hathaway could even end up as a winner of the current situation if it receives favorable rates of return for providing liquidity to some of the banks that need it right now.
Also, XLF’s second-largest holding, JPMorgan Chase & Co, makes up nearly 11% of holdings. JPMorgan is a major bank with plenty of liquidity that may also end up ultimately being a beneficiary of the trouble at smaller banks. For example, some observers have pointed out that customers and funds could leave smaller regional banks for JPMorgan and other major banks like Bank of America and Wells Fargo, which are also top five holdings.
Already, there is news that these aforementioned banks (along with several others) will contribute $5 billion each in deposits to help shore up First Republic Bank’s liquidity, which should provide them with some favorable returns in the future.
Additionally, XLF offers decent diversification with 67 total holdings, although the top 10 holdings make up over 50% of the fund, so it is more concentrated than it may seem at first glance. It invests in the financial sector of the S&P 500, so it allocates capital across a wide array of companies, ranging from the banks mentioned above to insurance companies like Chubb and Travelers Companies to asset managers like BlackRock and T. Rowe Price.
Other interesting holdings include S&P Global, the parent company of the S&P 500 index, the Intercontinental Exchange, and credit card giant American Express. Notably, American Express recently increased its dividend payout by 15% and announced a new share buyback program that authorizes it to repurchase up to 120 million shares, indicating that the company is operating from a position of strength.
Charles Schwab, another key holding, has sold off during the current Silicon Valley Bank crisis, but the stock also has plenty of positive indicators in its favor flooding in. The company saw a huge inflow of $16.5 billion in net assets last week, and insiders like CEO Walter Bettinger are buying significant amounts of the stock. Meanwhile, billionaire investor Ron Baron of Baron Funds is also adding to his position in the beaten-down stock, indicating that customers, insiders, and top investors are all bullish on the company’s prospects.
Investment banks like Goldman Sachs and Morgan Stanley also have a home in XLF’s top 10. All of this is to say that while this is a financial ETF, there is much more than just retail banks here. The banks that make up sizable positions, like JPMorgan Chase, Bank of America, and Wells Fargo, are the giants of the space, and they probably aren’t going away any time soon.
Below is a look at XLF’s top holdings, along with other key metrics.
Starting to Look Attractive
As mentioned above, many of these financial stocks look attractive from a valuation perspective. For example, Dow component Goldman Sachs, one of the bluest of blue chips, trades at just 9 times earnings, well below its historical average and far below the average multiple for the S&P 500, which currently sits at almost 21.
Goldman Sachs is also trading right at its book value, meaning that the stock is essentially trading for what it would be worth if its assets were liquidated. To me, the chance to pick up a long-term winner like Goldman Sachs at book value skews favorably from a risk-reward perspective.
Other top holdings look similarly cheap — Bank of America trades at just 8 times earnings and at about 10% below its book value, while Wells Fargo trades at 7.6 times earnings and just below 0.9 times book value. Even JPMorgan, which trades at a premium to these other names, as it is viewed by many as the best-in-class banking stock, trades at under 10 times earnings, which is still a steep discount to the broader market.
All of this adds up to the ETF itself having a very modest average price-to-earnings multiple of 11.7. Furthermore, XLF bolsters this appealing valuation with a dividend yield of 2.2% and a minuscule expense ratio of just 0.10%.
XLF — Nearly 30% Upside Potential
Furthermore, XLF also offers significant upside potential, according to Wall Street. The consensus rating is a Moderate Buy, and the average XLF stock price target of $39.75 implies 27.5% upside potential.
Of the 674 ratings on the ETF, 49.41% are Buys, 42.58% are Holds, and 8.01% are Sells.
TipRanks uses proprietary technology to compile analyst forecasts and price targets for ETFs based on a combination of the individual performances of the underlying assets. Further, TipRanks calculates a weighted average based on the combination of all the ETFs’ holdings. The average price forecast for an ETF is calculated by multiplying each individual holding’s price target by its weighting within the ETF and adding them all up.
Takeaway: Fortune Favors the Bold
To be sure, there is a lot of negativity toward the financial sector at the moment. Still, with analysts forecasting nearly 30% upside potential and the underlying stocks sporting undemanding valuations, being bold and buying the dip on XLF, which holds a wide assortment of blue chip financial stocks, could be a shrewd long-term move.
