The financial services sector currently offers investors the chance to buy some high quality companies with very bright futures at discount prices. Certainly, there are such stocks in almost all sectors but, crucially, the valuations within the financial services sector appear to be among the lowest in the index, thereby making it a great place for bargain-hunters to seek out their next investment.
For example, OneSavings Bank (LSE: OSB), a FTSE-250 listed mortgage and loan provider, trades on a price to earnings (P/E) ratio of just 11.5. This indicates that its shares are very cheap on both an absolute and relative basis, but when the company’s future growth potential is taken into account, it has an even greater appeal.
For example, OneSavings Bank is expected to increase its earnings by 32% in the current year, followed by further growth of 12% next year. This means that it trades on a price to earnings growth (PEG) ratio of just 0.9, which indicates that its shares look set to continue the 72% rise that they have posted since the turn of the year.
Furthermore, OneSavings Bank currently yields 2.1% and, with such strong earnings growth (as well as a payout ratio of just 24%), shareholder payouts are likely to rise. Furthermore, with interest rate rises likely to be somewhat slow, demand for loans should remain buoyant over the medium to long term, thereby providing a stream of potential customers for the bank to profit from.
Of course, OneSavings Bank is not the only bank with huge potential. Sector peer, Barclays (LSE: BARC), is also very, very cheap at the present time. It trades on a PEG ratio of just 0.4 which, for a bank that has remained profitable throughout the credit crunch, is a diversified operator and trades across the globe, seems to be unbelievably cheap. Certainly, regulatory issues have hurt investor sentiment but, unless investors believe that fines will cripple the bank, its current valuation seems to be hard to justify.
In fact, Barclays has been somewhat under the radar until its CEO departed recently. Prior to that, much of the discussion within the banking sector was with regard to the part-nationalised banks, as well as China-focused ones, and the onset of challenger banks. Barclays, though, is still hugely profitable and, with dividends set to rise so that it yields 3.5% next year (from a payout ratio of just 29%), it appears to be hugely enticing at the present time.
Meanwhile, broking specialist, ICAP (LSE: IAP), also offers significant capital gain potential. Its growth numbers may be somewhat lower than those of Barclays and OneSavings Bank, with it due to post a rise in its bottom line of 5% this year and 10% next year. However, with a very fair P/E ratio of 15.4, ICAP’s PEG ratio of 1.4 indicates that its shares offer good value for money. And, with the stock currently yielding 4.7% from a dividend that is covered 1.4 times by profit, it offers the best income prospects over the short to medium term out of all three stocks discussed here.
However, with its valuation being considerably higher than those of Barclays and OneSavings Bank, ICAP seems to less appealing than them at the present time (although I think it’s still a worthwhile purchase). And, while the outlook for OneSavings Bank is very bright, the size, scale and sheer resilience of Barclays mark it out as a more dependable place to invest. Plus, it has a more appealing valuation and yield than OneSavings Bank and, therefore, seems to be the better choice.
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Peter Stephens 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.