Financial stocks have been one of my favorite undervalued market sectors in 2016. The sector’s undervalued growth stocks that I like include a variety of banks, investment companies and brokerage firms—but no insurance company stocks are on my buy list.
51% Earnings Growth Expected in 2016
Today I’d like to highlight Zions Bancorporation (ZION). It’s a stock that I have my eye on, and I think you may want to watch it too.
Zions is a bank holding company that owns eight commercial banks, with about $60 billion in assets, and almost 500 branches in 11 states throughout the western U.S.
Zions is expected to grow revenue, net income and loans in 2016. In a March 2016 Morgan Stanley ranking of 29 mid-cap banks’ earnings growth, Zions ranked second vs. its peers. It also ranked fairly highly in funding strength and valuation.
Full-year 2015 earnings per share (EPS) were down from 2014 levels, largely due to the sale of the company’s remaining portfolio of its collateralized debt obligation (CDO) securities, and a corresponding one-time pretax loss of approximately $137 million.
Wall Street consensus estimates point to Zions’ 2016 EPS growing 50.8% to $1.81 per share, giving the company its highest EPS since 2007. That strong earnings growth is expected to continue in 2017—EPS estimates point to 19.3% additional growth.
First quarter 2016 results will be reported on April 25 after the market closes. The public may access the live conference call that afternoon, on the company’s website.
Undervalued, and the Stock Pays a Dividend
The stock’s 2016 price/earnings ratio (P/E) is 13.5; quite low within its recent range of 14 to 20. The dividend yield is 1.0%.
When a P/E is both lower than the EPS growth rate and lower than its normal annual P/E range, investors should sit up and take notice. If Zions’ share price simply returns to the middle of its normal annual P/E range, that would give it a P/E of 17 and a share price of $30.77, an increase of about 22% over today’s price.
The risk at Zions is about potential energy-related loan losses. Energy industry loans and leases make up about 7% of Zions’ total loan portfolio. The market’s concern about the health of energy companies will certainly linger until energy companies exhibit an upturn in profit trends and stronger balance sheets.
I would note, though, that Standard & Poor’s recently commented, “We think ZION is well-reserved for its energy exposure,” when oil was at $31.50 per barrel. Oil’s now at $41.50, so clearly, loan loss fears are easing up.
Institutions own 92% of ZION shares; a bullish sign of professional confidence in the stock.
The Stock’s Chart Shows the Rebound
The financial sector’s rebound from the winter’s market correction continues, with intermittent resting periods. ZION has recently been trading between 23 and 25.50. As the price rises, you should expect additional upside resistance at 27 and then again at 30.
ZION is a high-beta (volatile), mid-cap growth stock. I would certainly buy shares at the current price, and anticipate good capital gains in 2016.
Chief Analyst, Smart Investing in Turbulent Times