Favorite Financial Stocks After Fed Tightening
Undervalued Citigroup, Wells Fargo, BlackRock and T. Rowe Price present opportunity today.
In a widely anticipated move, the Federal Reserve raised its target for the federal funds rate by 25 basis points to 0.50%-0.75%. As we noted ahead of the Federal Open Market Committee meeting, however, inflation is still below the committee’s 2% goal and business fixed investment remains below desired levels. We believe these data points support our view that low real interest rates are needed to ensure full utilization of labor and capital for some time. We incorporate a federal funds rate of 2.25% and a 10-year Treasury yield of 3.5% by 2020 into our valuation models. The FOMC appears to agree, predicting only gradual increases in its target and an extended period of low rates by historical standards.
Relatively rate-insensitive names like Citigroup (C) and Wells Fargo (WFC) remain undervalued and attractive, in our view, while the most rate-sensitive banks have risen above our fair value estimates. Also, we like the fact that Citigroup and Wells Fargo are working through manageable performance issues, enabling them to control their destinies in a variety of rate environments. As for the trust banks and the asset managers, rate-dependent names--like Bank of New York Mellon, (BK) State Street, (STT), and Federated Investors (FII)--have already benefited from the market’s perception of future rate increases as well as regulation, with most of the asset managers rallying strongly since the presidential election on the belief that a Trump administration will curtail a lot of the regulation introduced since the 2008-09 financial crisis. Of the asset managers, we still prefer wide-moat-rated BlackRock (BLK) (the leading provider of exchange-traded funds) and T. Rowe Price (TROW) (which has the best and most consistent performance in the group) for long-term investors, as we believe they are the best positioned to deal with the secular trends affecting the industry, along with Northern Trust among the trust banks. All of these picks are currently trading at or above our fair value estimates.
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Jim Sinegal has a position in the following securities mentioned above: BLK. Find out about Morningstar’s editorial policies.