Three Reasons That Financial Services Stocks Are Attractive Right Now
One of the most attractive sectors for investors looking at under valued shares has been the financial services sector. This is because financial services companies are among the first companies that are expected to gain from a recovering economy. (Coincidentally, it was also the same sector that pushed the economy into the latest recession, but more about that later).
Over the past few months and definitely over the last year, there has been much debate about whether investors should place their money in such a doubtful sector of the economy. And with continued losses being reported by these firms, it seems that more and more people are heeding to such arguments and dumping these firms from their personal portfolios.
The argument goes, however, that these are the very firms that people should now be purchasing. Here are several current indicators which prove that while financial services firms continue to show disappointing numbers in the face of an economy that is only very slowly recovering, these firms will benefit tremendously and rather quickly.
1. Merger and Acquisitions. In the oil sector alone, Mergers and Acquisition activity amounted to nearly $37 Billion dollars. Other activity includes Dell’s bid for 3Par, MasterCard’s bid for DataCash, Intel’s purchase of McAfee, HP’s purchase of a security firm, the Newcrest and LGL merger worth $22 Billion alone, and many others. This type of activity requires the services of a bank and the largest banks will be among those who profit.
2. House prices. Although home sales have dropped considerably recently, a lot of economists suggest that the recent rebound in housing was largely due to a tax credit that recently expired. Noteworthy is that home prices continue to increase, a sign that people are paying more for their homes and increasing their wealth. As equity positions improve, people will need their retail banks more. This bodes well for the retail financial services that many firms have.
3. High profit margins. Although it was alarming and somewhat angering that many of the largest firms were in danger of being insolvent and bankrupt, it should not have come as much of a surprise that they were quickly and relatively easily able to repay government bailout funds. With an ability to retain cash and enjoy high profit margins even during the worst of times, financial services firms that are better capitalized and managed in the future will stand to enjoy even greater profitability as the economy recovers.
As shown by the above, investors should at least think twice about dismissing the financial services firms that they hold in their investment portfolios. With a recovery in the works, these could be the leaders in your portfolio over the long term.
