June 21, 2022- Bank of America Corporation (NYSE:BAC) and Discover Financial Services (NYSE:DFS)
With corporate credit markets showing surprising stability, two significant lenders are two of the best stocks to buy now.
Mercifully, we’re in a holiday-shortened trading week. Investors are getting a much-needed breather after last week’s carnage following the Fed’s 75-bps rate hike. Yet lost in the shuffle of these headwinds are opportunities. D.A. Davidson sees near-term upside for banks thanks to the Fed’s recent rate hike. U.S. corporate credit markets also show surprising signs of stabilization. With big lenders like Bank of America Corporation (NYSE:BAC) and Discover Financial Services (NYSE:DFS) noting strength in consumer spending and credit, these two giants are today’s best stocks to buy now.
Bank of America is a prominent player in the financial industry. It is a “Big Four” bank and responsible for roughly 10.73% of all American bank deposits. By the end of 2021, it counted approximately 67 million consumer and small business clients and roughly 41 million digital banking users. Mind you, these figures only scratch the surface of the bank’s reach. It also boasts 4,200 retail financial centers and roughly 16,000 ATMs.
Then there’s Discover Financial, a prominent player in the consumer finance industry. It recently beat earnings estimates while hiking its dividend. Analysts are noticing the upside too. Two analysts recently hiked their price targets, with one upgrade tacking it with a 66+% upside.
Warren Buffet once said that fear is an investor’s best friend. Stocks are potentially as oversold as they’ve been in the last 30 years. Yet the doomsday clock keeps ticking.
Don’t fret. BAC and DFS are two of the best stocks to buy now, and the reasons are plentiful.
Bank of America Corporation (NYSE:BAC)
Deeply oversold and undervalued, the big bank could be well-positioned with a 44.60% upside.
Bank of America is the U.S.’s second-largest financial institution and the world’s eighth-largest. Its primary services include commercial banking, wealth management, and investment banking. However, it is also a leading credit card institution.
Although it’s had a challenging 2022, it is one of our best stocks to buy now.
BAC is severely oversold and undervalued.
The BAC stock price has fallen over 25% in the last three months as recession fears mount.
However, markets always look forward. According to one of the bank’s competitors, JPMorgan, it is pricing an 85% chance of a recession.
By almost any metric you could think of, Bank of America is highly undervalued and oversold.
For one, the stock is trading around its 52-week lows and is -35.62% below its highs. Its 14-day RSI of 31.49 also indicates the stock could be oversold.
Additionally, the following multiples indicate that the stock is undervalued:
BAC is improving its efficiency while boasting respectable fundamentals and a solid dividend.
BAC management is aggressively buying back shares. It is also cutting costs to proactively improve its positioning in this economy. Measures include closing over 4000 physical branches and replacing manpower with digital automation.
This quarter, the underlying goal is to improve its cash flow and margins. Although the Company beat top and bottom-line estimates in its recent earnings, they declined year-over-year. Net interest margin was also disappointing.
BAC has a solid foundation to go off with solid margins, such as its 12.1% ROCE and 35.4% operating margin.
With its cost-cutting initiatives, don’t be surprised to see BAC hike its dividend soon. Its current dividend yield of 2.6% is attractive with the stock trading at nearly $32. However, Finbox projects it to increase another 16.7% at a 22.9% 5-year CAGR.
Rolling out its new cash management tool could be the icing on the cake.
Cash management is a $300 billion industry. Yet it’s a highly fragmented industry. BAC wants to disrupt and consolidate it and help multinational corporations.
A week ago, Bank of America announced it would roll out its cash management tool to U.S.-based clients. The tool, already available in Europe, helps companies manage multiple accounts. It creates a virtual ledger, accessible online, that shows all account balances and transactions. Companies can also model future cash flows with the tool. Better, the tool can be opened and used within a day, compared to weeks with a regular bank account.
Companies need tools like BAC’s. They often keep hundreds of different bank accounts to separate funds generated by their subsidiaries or clients. It is costly, time-consuming, and unnecessarily complex.
Analysts see considerable upside in BAC.
13 Wall Street analysts in total, over the last 3 months, offered a 12-month price target for BAC. It currently has a high price target of $51.00, a low of $42.00, and an average of $46.17, representing a 44.60% upside from June 17, 2022’s $31.93 close.
BAC’s year-to-date low and high are $30.86 and $49.58, respectively.
Discover Financial Services (NYSE:DFS)
Credit card borrowing is back, and recent analyst upgrades have this consumer finance giant looking at a potential 66.24% upside.
Discover Financial is a disruptive financial force. It’s best known for its credit card services, and it’s understandable why. With almost 50 million cardholders, it is the third-largest card in the U.S.
However, in reality, Discover is a full-scale financial platform. With Discover Bank, it provides many digital banking products and payment services throughout the United States. It offers checking and savings accounts, personal loans, home equity loans, and student loans.
An uptick in credit card borrowing could expand already strong earnings.
Discover reported Q1 earnings on April 27, 2022. It made a statement with EPS crushing analyst estimates by $0.60.
Most importantly, the Board of Directors approved the repurchase of up to $4.2 Billion of common stock and hiked the dividend by 20%.
With credit card borrowing seeing a post-pandemic uptick, DFS’s next earnings report could be even rosier.
The following catalysts could boost Discover’s earnings and make it one of the best stocks to buy now.
- Credit card balances and similar loans at U.S. banks are back near pre-pandemic levels. They are up 15% year-over-year as of May 25.
- Active card accounts with revolving balances have increased the past two quarters to 52.6%. This compares to 51.3% during the pandemic. When cardholders allow balances to revolve and incur interest, this means more revenue for Discover.
- Credit cards issued quarterly jumped 39% year-over-year in Q4 2021, the highest on record.
With these catalysts, DFS could see revenue grow at a 10.4% 5-year CAGR.
Discover’s trading at a deep discount with strong fundamentals and an attractive dividend.
Another reason why Discover is one of the best stocks to buy now is the stock’s deep discount. It currently sits -26.16% below its highs. Furthermore, it trades with a 5.3x trailing P/E, 6.3x forward P/E, and a 0.06 PEG.
You can paint an even stronger value case with DFS’s perfect 9 out of 9 Piotroski Score. This score, developed by Stanford accounting professor Joseph Piotroski, indicates that Discover has healthy Liquid Balance Sheets, Profitability, and Operating Efficiency.
It’s rare for a company to score a perfect 9. Perhaps some of its margins may add some context.
These fundamentals should allow management to continue its dividend. DFS’s 2.5% dividend yield is solid. However, following its 20% dividend hike, it could grow another 36.4% at a 10.8% 5-year CAGR.
Recent price target hikes point to a substantial upside for DFS.
DFS’s year-to-date low and high are $88.02 and $129.55, respectively. Although it’s trading closer to its low than high, many analysts see DFS as one of the best stocks to buy now.
Over the last 3 months, 12 Wall Street analysts offered 12-month price targets for Discovery. DFS’s average price target currently sits at $136.25, representing a 44.27% upside from June 17, 2022’s closing price of $94.44. The stock has a high forecast of $165.00 and a low of $97.00.
However, this average price target could be conservative.
On April 29, 2022, Deutsche Bank and Citigroup increased their DFS price targets. Deutsche Bank boosted its target from $145.00 to $150.00, while Citigroup did so from $154.00 to $157.00. This represents upsides of 58.83% and 66.24% from DFS’s June 17, 2022 close, respectively.