Hi I'm Jimmy in this video I'm gonna walk through a quick analysis of the financial
sector which looks like it could be undervalued in the hopes of trying to find which pockets
of the financial sector look to be most interesting once we identify which parts of the financial
sector sector look the best. Well we'll take a moment we'll dive into the companies within
that industry and then we'll go ahead and pick our favorite within the industry. So
in a recent video we did titled Is the stock market too high. Two sectors that look to
be a good value while the financial sector was one of those sectors. The other sector
was a material sector and I plan on diving deeper into each of those two sectors to see
if they really are a good value and which pockets of those sectors appear to be the
best value. This video we're going to dive deeper into the financial sector. So just
so we're on the same page. I just want to break down how I'm coming up with the numbers
that I'm using and how the sectors are broken down. So in the last video I referenced GICS
sectors which is short for Global Industry Classification standard. So GICS breaks down
all publicly traded companies into these eleven GICS sectors. Now since we're looking closer
at the financial sector I'll break that one out even further so we can see how the industries
play into it. So if you're ever wondering the difference between an industry or a sector
or a sub industry. Well this is how GICS breaks it down. So we start with the sector. And
in this case it's the financial sector and then the sector can be broken into industry
groups. These are the three industry groups that fall within the financial sector. We
have banks diversified financials and insurance. So these three fall under what GICS classified
as Level 2 which is industry groups. Now industry groups can be broken into industries. Industries
are considered level three. And as we could see there are logically a lot more industry
than there are industry groups. And then we can break industries into sub industries seven
industries are often called Level Four according to GICS. Now we may also notice that not all
industries are broken into sub industries insurance as an example stops at the industry
level. So the way I do this analysis is I looked at the companies in the S&P 500 by
grouping. So for the consumer finance industry just as an example there were four companies
within that industry. They were Discover Capital One American Express and synchrony but that
isn't all the companies in the industry. These are just the companies that are in this industry
and they're also in the S&P 500. If I stuck with all the companies in the United States
that fell into that sector or that industry well there would be 92 companies in Europe
I found over 800 companies and worldwide there were about thirteen hundred plus. So I just
want to clarify that what we're doing is we're sticking with S&P 500 companies. We're not
pointing out all the companies that are in that industry. Narrowing it down like this
makes it easy to get through all of the data and in my case I'm actually using indexes
that are that were built by Standard and Poor's for each of these groupings. So that speeds
up the research process even more. Now I recognize that YouTube is a global platform and our
community goes far beyond just the shores of the United States. So if you want me to
do a similar analysis for other parts parts of the world let me know in the comments below.
I think it could be very interesting to expand beyond just the S&P 500. OK. So since we know
that we're only dealing with companies that are in the S&P 500. Well clearly not all of
these groups are going to be represented by S&P 500 companies. So these are the groupings
that have at least a few companies from the S&P 500 in them. So we're left with eight
different groupings for us to analyze. So let's see where the value is within these
groups First let's clean all this up. Okay. So in our last video we identified that the
financial sector was a potential value because it had an average PE for the entire sector
of about thirteen point two X which was low relative to the market and other industries.
Now that thirteen point two X is a trailing PE which means that it uses the last 12 months
of earnings versus today's price. But personally I much prefer a forward PE forward P E looks
at the next 12 months of expected earnings according to analyst estimates. This is an
advantage of using S&P 500 companies since they tend to have a lot of analysts coverage.
So the forward PE for the financial sector is about eleven point nine X and as I pointed
out in the last video and as others pointed out to me in the comments we can't really
say if that's a good value unless we compare it to something. Well I checked the historical
averages for the financial sector and their two year average came in at twelve point nine
X and their five year average came in came in at thirteen point threeX. I also checked
the 10 year average and that came in the same as the two year average which was twelve point
nine X but for this video I'm just going to stick with their two year average and five
year averages and then we're going to try to identify which sectors using their own
historical averages look to be the most interesting. So it seems that the financial sector does
look like a relative value compared to its own history. But now let's run through each
of the industries to see where they stand relative to the sector and relative to their
own history. So diversified banks comes in right now at about 10x which looks good relative
to their two year average of eleven point five X and their five year average of eleven
point threeX. Okay. Not bad. Regional banks currently has a forward PE of about ten point
seven x which is less than the sector and less than their own two year average of twelve
point eight x and their five year average of twelve point seven weeks. Okay so let's
just speed this up a bit and how about we just unveiled all the data for now and we
could break it down from there. OK. So at first glance we can eliminate financial exchanges
and data as a potential value since it is both above the sector and above their own
averages. Diversified financial services falls into the same category. So we can cross that
off the list. And insurance looks like it's both fairly valued based compared to the sector
and to its own history. So i'll cross that one out as well. Okay now let's narrow this
down to just the industries that appear to be have the biggest gap between their own
history and their current forward PE. So it's across these industries out as well. This
leaves us with just three industries. So now it's a matter of narrowing down these three
industries into the one that we want to look closer at. So the regional banks industry
has 14 companies in it that are also in the S&P 500. So that's probably a bit too much
for us to dive through in this video. So I'm going to cross that one out. Even though it's
possible that there may be some great investment opportunities in there but that's sort of
the nature of came we've got to decide what we want to research and what we don't. Okay.
This leaves us with two possible industries to consider investing in. So the first is
the diversified banks industry and then we have the investment banking industry. So now
our question is what is the best way to value these specific industries. And although Price
to Earnings works for both of these industries I could easily make the case that a better
way to value these types of companies would be to use a price to book value or more specifically
price to tangible book value. I think that that would be the best way to value these
types of companies. So now if we switch to price to tangible book value. Well once again
we can compare it to their own two and five year averages. Well looks like diversified
banks is trading below their two year average but above their five year average. So it's
a little bit of a value investment banking and brokerage on the other hand is trading
right at its five year average but further below the two year average. So I'd say we
focus there and this should be quick because there's only five companies within this industry.
So these are the five companies that are within this sub industry. So now we can add the current
price to tangible book value and the two year and five year averages. Well now we can start
by crossing some of these names off the list. So first up we have E-Trade and we could see
that E-Trade looks relatively overpriced compared to its own history and we could see that because
the price to tangible book value is higher the current price is higher than both their
five year and two year averages. So we'll cross them off the list. Now I also want to
point out that E-Trade is a fundamentally different business than something like Goldman
Sachs. That's why I'm leaning on their own histories and not the industry numbers. That
being said Charles Schwab looks like it's doing pretty good compared to its own history.
Looks like it could be a pretty good value. So does Goldman Sachs. But both Raymond James
and Morgan Stanley look like they're at best fairly priced. So let's cross them off the
list. So when we clean this up a bit well we can see that we're left with Charles Schwab
and Goldman Sachs and I actually did a video on Goldman Sachs and I'm a huge fan of this
company and the fact that it's trading less it's trading for less than price to tangible
book value seems like a great opportunity to me. Now I'll leave it do link in the description
below for if you're interested in a more thorough stock analysis for Goldman Sachs. I love the
company and then we have Charles Schwab. Now I haven't looked closely at Charles Schwab
stock in a long time so it be tough for me to say whether or not I will like this stock
like I can say about Goldman Sachs. That being said if you'd be interested in seeing a deeper
analysis on Charles Schwab a lot like we did for Goldman Sachs link in the description
below let me know in the comments and I'll be sure to dive deeper into that stock to
see if we can give a better assessment as to whether or not it's a fair value because
I often believe that it takes more than just these frankly very shallow numbers is a great
way to identify good opportunities. Goldman Sachs is a good example of that we did a ton
of research on that. I really like the company and now it looks like it's trading at a really
good value. So for me I'm happy with the takeaway that Goldman Sachs looks like a great deal
right now. It's in the right sector the sector looks cheap. It's in the right industry. The
industry looks cheap and it looks like the company looks cheap right now. So the only
thing I'd want to double check is to make sure it's not a value trap. Make sure some
news hasn't come out recently that is somehow forcing the stock lower and perhaps it should
be lower. I haven't seen anything like that but if you have let me know in the comments
below. That being said do you think that Goldman Sachs looks like a good buy right now. What
about Charles Schwab. Do you own it. Have you seen anything about it. Do you think we
should make a video on that. Let me know in the coming blog. I want to thank you for sticking
with me all the way to the end of the video. If you haven't done so already hit the subscribe
button at the thumbs up thanks and stick with me the end any comments questions or anything
but in the comments below and I'll see in the next video. Thanks.