The raging bull market has lifted U.S. stock indexes to record heights, but the financial sector has been a notable laggard. Rising interest rates and fears of an economic slowdown have depressed valuations for many banks and lenders. However, within this beleaguered group lie several undervalued gems that could deliver massive gains to investors with the foresight and fortitude to buy them at today’s bargain-basement prices.
At the forefront of these potential wealth-makers is a trio of financial titans whose shares have been unduly punished – Citigroup, Goldman Sachs, and LendingClub. While each faces its own challenges and uncertainties, their ridiculously cheap valuations may represent once-in-a-decade opportunities to scoop up elite franchises on the cheap before the crowd catches on.
The Resurrection of Citibank
For much of the past decade, Citigroup (C) has been a disappointing underachiever unable to generate consistent profits or please any but its most patient investors. The megabank’s wide global footprint that was supposed to be a strategic asset often appeared to be an unwieldy conglomerate of disparate businesses pulling in different directions.
Then a massive $400 million fine in 2020 for risk management failures was the final straw that signaled radical change was needed at the lumbering giant. Enter new CEO Jane Fraser with an aggressive turnaround plan to shed non-core assets, streamline operations, and double down on Citi’s strengths.
In short order, Fraser took a machete to the bloated organization – exiting 13 international consumer banking markets, slashing the workforce, and divesting billions in assets. While the financial impacts of the overhaul were initially painful, they opened the path for a revitalized Citigroup to emerge as a more focused and profitable powerhouse.
The markets have been skeptical so far, continuing to value Citi at a mere 33% of its tangible book value. This is well below the premiums that better-run peers like Bank of America and Wells Fargo enjoy. However, top bank analysts see the ensuing years as an epic turnaround story that could send Citi’s cheap shares soaring.
Closely followed Wells Fargo analyst Mike Mayo is particularly bullish, setting a $100 price target for the stock – more than double current levels – as the benefits of the restructuring kick in. For risk-tolerant investors who buy today, the rewards could be of Biblical proportions.
Goldman’s Kingdom for an IPO Boom
As the preeminent global investment bank, Goldman Sachs (GS) is highly susceptible to swings in capital markets activity. When deal-making is hot, Goldman’s bankers collect huge fees from facilitating mergers, acquisitions, and public stock offerings. But in lean times when the corporate hormones aren’t raging, Goldman’s coffers can look relatively barren.
The past couple of years have been a famine for the venerable “Wall Streetית” as elevated interest rates and recession worries put a chill on corporate animal spirits. High profile deals like the Twitter/Musk drama grabbed headlines, but overall deal count and volume plummeted as companies hit the brakes on major transactions.
The data tells the brutal story – according to PwC’s trackers, the 175 IPOs priced in the U.S. public markets over 2022 and 2023 was a mere 18% of the staggering 951 new issues that hit the tapes just in 2021 alone. As a lead underwriter on many of these offerings, Goldman watched its investment banking revenues crater 56% from peak levels over the past two years.
Yet in every winter, the seeds of spring’s rejuvenation are planted. Early green shoots of an IPO revival are starting to poke through the icy ground, with buzzy unicorn startups like Reddit, Stripe, and fintech Klarna topping the list of potential mega-offerings. If just a few of these flourish and encourage a new wave of public listings, Goldman’s beaten down shares could blossom alongside the shiny new issues it ushers to market.
Currently trading at just 9.9x forward earnings – a multiple more fitting for a staid commercial bank than a leading investment house – Goldman looks like an extremely undervalued call option on a resurgence of capital markets activity. For investors willing to be patient while the markets inevitably cycle back toward frothiness, the upside could be tremendous from today’s depressed stock price.
LendingClub: A Consumer Debt Consolidation Play
Perhaps no segment of the finance industry is poised to benefit more from the combination of elevated interest rates and heavy consumer debts than the debt consolidation lenders. As America’s pioneering fintech platform providing debt refinancing solutions, LendingClub (LC) stands at the crossroads of these potent trends.
U.S. households are currently lugging around a record $1.13 trillion in credit card balances racking up interest charges at rates exceeding 20% on average. For cardholders struggling under this burden, rolling those high-cost revolving balances into a fixed-rate personal installment loan can provide hundreds or even thousands of dollars in annual interest savings.
LendingClub has long facilitated this process through its online lending platform that efficiently matches borrowers with investors eager to fund their loans. However, the company turbocharged its strategy in 2021 by acquiring Radius Bank which enabled it to hold a growing portion of its most creditworthy loan originations on its own balance sheet.
In recent quarters, anywhere from 15% to 25% of new loans have been retained by LendingClub, supercharging its earnings stream by collecting interest payments over the lives of those loans in addition to upfront origination fees. Company leadership has been vocal about their preparations to “meet the historic refinance opportunity ahead” as consumers look to escape the vise of credit card debt.
Key to this effort will be improving the seamless user experience of the LendingClub platform to cater to debt consolidation customers with new capabilities like allowing them to easily bundle existing loan balances together with new card payoffs into a single streamlined repayment plan. This would eliminate much of the hassle and friction of consolidating scattered debts from disparate creditors.
Debt consolidation is never more attractive than when benchmark interest rates are high yet potentially peaking, like the current environment. Any signs that rates are topping out could spark a tidal wave of consumers looking to get ahead of potential declines by refinancing into fixed-rate products from LendingClub.
Trading at a modest 11x forward earnings and an 18% discount to tangible book value, LendingClub shares are priced for stagnation rather than the growth spurt that easy money from aggressive consumer marketing and improved product capabilities could unleash.
Fortunes Hiding in the Bargain Bin
The “babies” may have been thrown out with the bathwater at too many banking outfits lately, oversold by skittish investors rattled by macro fears and haunted by past industry crises. But behind the grime of today’s tarnished reputations and depressed share prices, there is real value shining through for those willing to dig through the discount bin.
Legendary investors from Sir John Templeton to Warren Buffett have grown immensely wealthy by mastering the counterintuitive strategy of “buying when there is blood in the streets.” The dominoes may not be perfectly set up today at Citigroup, Goldman Sachs, and LendingClub, but their deep undervaluations, prospective catalysts for improvement, and high shareholder-friendly stock buybacks offer the potential for outsized gains if things click into place.
It takes a stout heart to load up on meaty positions in stocks facing serious headwinds. But for those who can stay rational when others are fearful, the fortunes await in these fire-sale prices on quality franchises in secularly advantaged segments of modern finance.
