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Five Financial Stock Picks for the Second Half

Analysts are expecting big earnings from the financial services companies in the second half. Here are five names that look cheap against those projections.

NEW YORK (

TheStreet

) -- The second quarter is winding down, and even though many of the stocks are down of late because of concerns about the eventual shape of financial reform and the pace of economic recovery, earnings for the financial sector are still supposed to be pretty good.

According to the latest data from

Thomson Reuters

, as of June 23, Wall Street was expecting the financial companies in the S&P 500 to grow profits by 24.3% on an aggregate basis. That figure is up from an estimated 11.7% growth in earnings as of April 1, which was before the kick-off of first-quarter reporting season.

What's even more compelling, however, is the projections for the second half, when many analysts are anticipating banks will finally start getting back to normalized earnings levels.

For the third quarter, analysts are expecting earnings growth of nearly 84%. That view is the strongest of the 10 industry sectors within the S&P 500 that

Thomson Reuters

tracks, and well ahead of the overall analysts' view for the index for earnings growth of 25.7%.

For calendar year 2010, owing to the influence of 2009's brutally high credit costs, the aggregate view based on analyst estimates is for earnings growth just shy of 150% from the financial sector, compared to growth of 33.4% for the S&P 500 as a whole.

In light of those numbers, we decided to analyze five sub-sectors of the financial services industry and come up with the most attractive names in each. In most instances, we went with the company that was trading at the best forward price-to-estimated earnings multiple for fiscal 2010, but we also took into account company-specific operating issues, individual analyst opinions, and other metrics, such as price-to-tangible book value and whether or not the company still owed bailout funds.

Here's the list, starting with everybody's favorite quartet of "too big to fail" behemoths, the money-center banks --

Bank of America

(BAC) - Get Bank of America Corp Report

,

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

,

Wells Fargo

(WFC) - Get Wells Fargo & Company Report

and ....

Top Money-Center Bank: Citigroup

(C) - Get Citigroup Inc. Report

Assets:

$2 trillion at March 31, 2010

Stock Performance Year-to-Date:

Citigroup's stock is up 17.5% for the year through Wednesday's close at $3.89, but it's pulled back 23% since last edging above $5 on an intraday basis on April 21.

Wall Street Sentiment:

Analysts are bullish on Citi these days. Of the 23 analysts that cover Citi, 12 analysts rate the bank at buy, while just four have sell ratings, according to

Bloomberg

.

Analysis

: Citigroup was recently featured as a compelling play among

TheStreet's

10 Bank Stocks Trading Below Book Value

. You can see in the table above that the stock is by far the cheapest relative to tangible book value among the money center banks and also has the lowest valuation to the average earnings estimate for 2010, among analysts polled by

Thomson Reuters

.

With government assistance behind it and the prospect of further dilutive common equity ratings off the table, there's no reason for the shares of a profitable bank of this size to trade right at its liquidation value. While there is uncertainty for the largest bank holding companies as Congress moves closer to voting on financial reform legislation, Citigroup is the best positioned holding company for investors over the short term because of the heavy discount on the shares.

The Treasury's slow paring of its stake in the company is an overhang for the stock, but continued profits would go a long way toward countering that influence, especially since the stock has tremendous liquidity, topping the volume charts for the New York Stock Exchange on almost a daily basis.

The latest word from management is bullish as well as

CEO Vikram Pandit

told

CNBC

earlier this month that the bank is now focusing on making money through its core businesses.

"This is about Citicorp not about Citi Holdings," Pandit said in the interview. He added that the bank is "back to doing what we should be doing" even though "the volumes are different," as the markets are still volatile.

Citigroup is slated to report its second-quarter results on July 16, and the average estimate of analysts polled by Thomson Reuters is for a profit of 6 cents a share on revenue of $22.3 billion. Last quarter, the company came through with a surprise profit of $4.4 billion, or 15 cents a share, as revenue of $25.4 billion beat Wall Street's consensus view by almost $5 billion.

Top Investment Bank: Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

Assets:

$881 billion as of March 31, 2010

Stock Performance Year-to-Date:

Goldman Sachs' stock plunged 13% the day the

Securities and Exchange Commission

filed civil fraud changes against the company related to its sale of certain CDOs with underlying subprime securities. The stock is down 25% since April 15 -- the last trading day before the suit was announced -- and 20% year-to-date.

Wall Street Sentiment:

Despite a raft of lowered earnings estimates of late, analysts remain extremely bullish on Goldman Sachs. Eighteen of the 25 analysts covering the company recommend investors to buy shares, and none have sell ratings on the investment bank, according to

Bloomberg

.

Analysis:

The market has a long-term tendency to heavily discount Goldman's shares for several reasons, including the company's high bonus payout to employees, low dividend payouts, and of course, the target on its back. Right now, as evidenced by the chart above, it's trading below its peers on a forward price-to-earnings estimate basis through 2012.

Its second-quarter report, which is due on July 20, may present a real challenge however as analysts cutting estimates are citing a weak business environment that may have put the brakes on Goldman's bread-and-butter trading businesses.

On Wednesday, Barclays Capital analyst Roger Freeman slashed his

second-quarter profit view

for Goldman to $1.95 a share from $4.29 a share, with expectations of a 40% sequential drop in FICC

fixed income, currency and commodities trading revenue resulting in the biggest hit to the bottom line. We've lost count of how many times Goldman has blown through earnings expectations through thick and thin, but this quarter may provide a real test.

Uncertainty tied to the coming bank reform legislation is also a weight on shares but if Goldman is forced to spin-off its proprietary trading from its other operations and investors pummel the shares, it simply boils down to another golden investment opportunity.

Still, even given that Goldman is facing one whopper of a PR issue as it addresses the SEC fraud case and any near-term pressures, most analysts agree the Goldman franchise remains solid.

Mark Lane, an analyst at William Blair & Co., who also recently lowered quarterly estimates on Goldman, rival

Morgan Stanley

(MS) - Get Morgan Stanley (MS) Report

, and other large bank because of the pullback in global equity and credit markets, sees value in the stock and rates it the equivalent of a buy.

"Goldman trades at only 1.22 times estimated second-quarter tangible book value per share," Lane wrote in a research note. "We do not expect the business models of

both Goldman and Morgan to be pulled apart nor do we believe either company needs additional capital, thus supporting our view that both stocks offer attractive value."

Lane adds that he does not expect the SEC charges "to have any noticeable impact on Goldman's business, particularly since it has become clear that the scrutiny on certain business practices, including the marketing of mortgage-related CDOs, is industrywide and not specific to Goldman Sachs."

Top Online Broker: TD Ameritrade

(AMTD) - Get TD Ameritrade Holding Corporation Report

TheStreet Recommends

Assets:

$332 billion as of May 31, 2010

Stock Performance Year-to-Date:

TD Ameritrade's stock was down roughly 14% so far this year through Wednesday's close , and it's off 19% since closing at $20.44 on May 3.

Wall Street Sentiment:

Analysts are pretty positive on TD Ameritrade with 10 of the 19 analysts recommending investors to buy shares, according to

Bloomberg

.

Analysis:

TD Ameritrade is the second-largest player among the four online brokerage firms listed here, has had the strongest recent earnings performance and is priced the cheapest relative to projected 2011 and 2012 earnings.

E*Trade Financial

(ETFCD)

is cheaper on a price-to-tangible book value basis, but the company is still working through problem loans in its banking unit, and Wall Street doesn't expect it to return to profitability until the fourth quarter of this year.

Some analysts are gloomy about the group in light of the impact of

economic uncertainty

on retail trading volumes, but Keefe, Bruyette & Woods analyst Joel Jeffrey has an "outperform" rating on Ameritrade shares, with a 12-month price target of $23.50, a plus 40% premium to current prices.

The company is expected to report its fiscal third-quarter results on July 21, and the average estimate of analysts polled by

Thomson Reuters

is for earnings of 28 cents a share on revenue of $682.4 million, a performance that would be a sequential improvement on both counts from its first-quarter numbers.

Top Super-Regional: PNC Financial Services

(PNC) - Get PNC Financial Services Group, Inc. Report

Assets:

$265 billion as of March 31, 2010

Stock Performance Year-to-Date:

PNC's stock is up 15% this year.

Wall Street Sentiment:

Of the 31 analysts who cover PNC, 22 rate the bank a buy and only one analyst has a sell rating,

Bloomberg

says.

Analysis

: PNC was among the

names

listed as potential acquirers of other large institutions last week, when an analyst told

TheStreet

that large industry players could once again turn to traditional bank mergers next year as opportunities for lucrative government-assisted acquisitions of failed banks begin to fizzle because of heavier competition and other factors.

Among the six super regionals analyzed here, PNC was trading at the lowest multiple to projected 2010 earnings as of Tuesday's close, although

U.S. Bancorp

(USB) - Get U.S. Bancorp Report

was trading lower relative to 2011 and 2012 earnings projections.

SunTrust

(STI) - Get SunTrust Banks, Inc. Report

,

Regions Financial

(RF) - Get Regions Financial Corporation Report

and

Fifth Third Bancorp

(FITB) - Get Fifth Third Bancorp Report

were all cheap relative to book value and to 2012 earnings projections, but weren't projected to return to profitability this year.

PNC is top pick among the regional banks for RBC Capital Markets analyst Gerard Cassidy, who believes the valuation is very attractive at current levels when the company's normalized earnings opportunity is taken into account.

Additionally PNC's cost savings from its 2008 acquisition of National City may be greater than the company's forecast, he says, noting that management "has upped them once" already. "We think they are going to up them again as the company comes through with this integration quite successfully," Cassidy told

TheStreet

.

The Pittsburgh-based bank is slated to report its second-quarter results on July 19 and the current average estimate of analysts polled by

Thomson Reuters

is for a profit of $1.28 a share in the June-ending quarter on revenue of $3.8 billion.

Top Small Regional: Oriental Financial Group

Assets:

$6.5 billion as of March 31, 2010

Stock Performance Year-to-Date:

Oriental Financial's stock is up 21% year-to-date, but it has pulled back around 25% since hitting a 52-week high of $17.44 on April 30.

Wall Street Sentiment:

Just eight analysts cover this stock. Half of them rate it at buy and only one says sell, according to

Bloomberg

.

Analysis:

Oriental Financial Group was one of

Five Bank Stock Bargains

TheStreet

identified after sharp stock declines in late May, by applying conservative criteria to first-quarter financials. Among the group of smaller regional banks listed here, the Puerto Rico lender stands out with the lowest price-to-tangible book ratio and lowest valuation to 2010 and 2011 projected earnings.

The company is sitting pretty in its home market, with the best loan quality of any bank in the territory and the FDIC-assisted acquisition of deposits and assets from the failed EuroBank on April 30, which grew Oriental's balance sheet by 26% to $8.2 billion. Before the acquisition, Oriental raised $200 million in a preferred offering, which was subsequently converted to common.

With the common equity raise behind it, an expanded market share in Puerto Rico and low price valuation, Oriental Financial is a low-risk growth opportunity. The company has managed to escape the death spirals of several Puerto Rican peers left by a shaken local economy. Its bank unit has so far raised $300 million in capital this year and now has ample cushioning, which allowed it to make the EuroBank purchase.

Bain Slack, an analyst at Keefe, Bruyette & Woods, says Oriental Financial is "one of the best ways to play the dislocated and recently consolidated banking industry in Puerto Rico," in a June 1 note.

With the addition of EuroBank, Oriental Financial's operations and business model is "changing toward a higher-multiple, deposit-based lending franchise and away from its previous leveraged security portfolio model," Slack writes.

"Becoming more bank-like, in our opinion, should allow for valuations at a premium to tangible book value of $12.58 and as the integration of EuroBank comes into focus, we think valuation should begin to be based on earnings. We expect normalized earnings to be in the range of $2.00-$2.25," he writes.

Analysts expect Oriental Financial to post a profit of 31 cents a share for the second quarter, according to

Thomson Reuters

. The results are due on July 21.

-- Written by Laurie Kulikowski in New York and Philip Van Doorn in Jupiter, Fla.