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2 Financial Stocks I'd Buy Right Now. by saninng (m): 3:09pm on September 25
Sani Ibrahim
Abubakar Tafawa Balewa,University
Agricultural economics and extension
100Level, Nigeria.
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If you want growth and value from the companies you invest
in, these financial sector stocks have you covered.
While stocks in the financial sector are down on average by
nearly 16% year to date, don't be scared away from investing
in the sector. While financials have been hit hard by the
pandemic and recession, for every bank stock that's down
35%, there is a fintech that's up for the year. Some have even
performed better during the pandemic. And even among those
stocks that are down, there are many great values that you
can pick up relatively cheap.
Here are two financial sector stocks I'd buy right now -- one
that will be a growth engine for years to come, PayPal
Holdings ( NASDAQYPL ), and one that's a terrific value, Axos
Financial ( NASDAQ:AX ).
1. PayPal hitting all-time highs during pandemic
The services that PayPal provides -- digital and mobile
payments -- have been especially critical for consumers and
merchants during the COVID-19 pandemic. PayPal's payment
volume increased 29% in the second quarter compared to the
same period last year, and PayPal's number of active accounts
climbed 40% year over year to 346 million.
Image source: Getty Images.
As a result, revenue climbed 22% to an all-time high of $5.3
billion, and net income spiked 85% to $1.5 billion in the
quarter. Venmo, PayPal's mobile payment service, provided a
huge boost, generating $37 billion in total payment volume in
the quarter, up 52% from the second quarter of 2019. It has all
contributed to a stock price that is up 73% year to date.
But I wouldn't buy PayPal now just based on its performance
this year. What's far more enticing are the company's long-
term growth prospects. PayPal is the market leader in online
payments, and it has steadily increased its market share,
which is 55%, through innovations like Venmo.
The company now stands as the leader in a space that's
rapidly growing as the world moves toward cashless
payments, a trend that has been accelerated by the pandemic.
What puts PayPal in a great position to continue to grow with
the industry is its strong cash position. Cash flow from
operations jumped 103% to $2.4 billion in the second quarter
year over year, and free cash flow increased 112% to $2.2
billion. That much free cash flow means the company has a lot
of money to invest in new technologies to expand its growth
opportunities, like its current investment in touch-free QR
code technology for payments.
Now is a particularly good time to buy PayPal, as the stock
price has dropped about 6% in the past month due to the
September tech sell-off.
2. Axos has a lot of value
Axos Financial is an online bank that is a buy for a different
reason than PayPal. It is a great value right now with long-term
growth potential. The stock is down about 26% year to date,
but that drop has largely been a function of the pandemic and
economy, which has hurt all banks. However, the underlying
fundamentals are very strong.
In its fiscal fourth quarter, ended June 30, Axos posted net
income of $45.3 million, up 11.5% year over year. For the full
fiscal year, which included two quarters of a pandemic, net
income was up 18% to $183 million.
One of the factors that has set Axos apart is its high-quality
loan portfolio. It is primarily a mortgage lender of asset-
backed loans, which are safer than commercial loans to hard-
hit industries. President and CEO Gregory Garrabrants said on
the fourth-quarter earnings call that about 94% of the
company's loans had a loan-to-value (LTV) ratio in the 50s --
which is excellent. The LTV measures the value of the loan
relative to the assets, so the lower the better because less is
outstanding. This is one of the reasons why Axos had a
relatively low provision for credit losses -- $6.5 million in the
quarter -- compared to other banks.
There are two other numbers that jump out at me about Axos.
One is its efficiency ratio , which is a spectacular 49.1%. This
means that its expenses relative to its earnings are low. That's
down from 51% a year ago. The efficiency ratio for just the
banking business is 41%, down from 43% year over year.
The other is its price-to-book ratio, which is the value of its
assets versus its stock price. It has a price-to-book ratio of
1.15, which means that the stock is trading at a pretty low
price relative to its assets on the books. The price-to-earnings
ratio is also low at about eight, meaning the stock is low-
priced relative to its earnings.
These are all factors that make Axos a great value right now.
It is in a better position than its peers, and should remain so
as an online banking leader at a time when consumer
behaviors and trends are moving in its direction.

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