2 of the best financial stocks for bold investors?

Roland Head reviews one growth stock and one deep value play. Which should you add to your portfolio?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The financial sector remains a challenging area for investors. Big banks such as Barclays (LSE: BARC) have repeatedly disappointed shareholders. But other City firms have proved very profitable buys.

Shares in FTSE 250 spread betting firm IG Group Holdings (LSE: IGG) have doubled in value over the last five years. However, the firm’s stock fell by 5% in early trading today after IG reported “subdued” trading during July and August.

In this article I’ll take a look at today’s figures from IG Group and explain why I believe both IG and Barclays are a buy at current levels.

What happened in Q1?

IG’s global revenue rose by 5.1% to £111.4m during the three months to 31 August. The group reported an impressive 18% increase in the number of active clients during the quarter. However, revenue fell by 1.8% to £55.4m in the UK and Ireland, despite a 24% increase in the number of active clients.

The main reason for this was that IG reduced the amount of gearing available to clients ahead of the EU referendum. This was done to reduce the risk of large and unmanageable client losses. The effect on trading levels was dramatic — revenue per client fell by 21% in the UK & Ireland.

A quality business

IG’s short-term revenue growth will always be linked to market conditions. But the group’s long-term track record suggests it’s a quality business with a lot to offer investors.

IG reported an operating margin of 42.5% last year and generated a return on capital of 31%. These extremely high figures are consistent with past years’ results. They highlight IG’s ability to generate big profits from capital invested in its business.

The group ended last year with no debt and cash and short-term investments of £329m. That’s enough to cover last year’s dividend payment of 31.4p nearly three times over.

As I write, IG shares are trading at 900p. This puts the stock on a 2016/17 forecast P/E of 18.6 with a forecast yield of 3.7%. That’s not especially cheap, but earnings per share are expected to grow by 12% next year. I rate IG as a buy at current levels.

A bold banking buy?

Barclays constantly seems to be on the verge of a strong recovery, without ever reaching its destination. Profits have been crushed by massive misconduct fines and PPI compensation payouts, but this process is coming to an end. Barclays is also gradually managing to dispose of its unwanted non-core assets.

Barclays’ balance sheet is much stronger than it was five years ago. The bank’s core business generated an impressive return on tangible equity of 12.5% during the first half of this year.

This figure was dragged down to 4.8% at group level thanks to losses of £1.5bn on non-core assets. However, I believe these figures highlight the opportunity that’s on offer for value investors. Barclay’s has a tangible net asset value of 289p per share. That’s 76% higher than the current share price of 165p. Adjusted earnings per share are expected to rise by 55% to 17p in 2017, putting the stock on a P/E of just 9.8.

I believe Barclays is a compelling value buy at current levels. The only catch is that investors may need to be patient in order to collect a profit.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Barclays. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »