The collapse of Silicon Valley Bank last month raised a lot of concerns about the health of banks and other financial companies. That caused an initial stock market swoon that spread throughout the industry. Yet not every financial company is exposed to the same challenges that Silicon Valley Bank was. As a result, there may be some opportunities for aggressive investors looking to take advantage of the market's general concerns.
With that in mind, three Motley Fool contributors gathered their thoughts in an effort to find three financial stocks that looked likely to survive this mess. They picked Prudential Financial (NYSE: PRU), Axos Financial (NYSE: AX), and American Express (NYSE: AXP). Read on to find out why and decide for yourself if any of these financial stocks deserve a place in your portfolio.
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A company that takes being "rock-solid" to a whole other level
Chuck Saletta (Prudential Financial): Imagine a financial company that is so obsessed with being seen as rock-solid that it uses an actual rock as its corporate symbol. There is such a company, Prudential Financial, and the rock it uses is the Rock of Gibraltar.
It backs that symbolism up with an extremely solid balance sheet. After simplifying its business model in 2022 to reduce its exposure to market volatility, the company has $16.2 billion in equity on its balance sheet. For insurance companies like Prudential Financial, balance sheet strength is key to the business's ability to withstand larger-than-expected claims and still support its policyholders.
While unexpected losses are part of the insurance business, insurance companies regularly adjust their premiums based on claims experience and changing projections. Those adjustments, along with the fact that typical insurance policies are time-limited, meaning that large, well-managed insurance companies are much less exposed to "bank run" type catastrophic losses.
Consider, for instance, that according to the National Institutes of Health, there were nearly 1.2 million excess deaths in the United States in the first two years of the COVID-19 pandemic. Life insurance policies generally paid out for those deaths, as long as the deceased was insured. For well-managed insurance companies with decent balance sheets to cover the excess claims from those deaths, the response was essentially "pay the claims, adjust for the future, and move on."
Prudential Financial has been in business since 1875, which means it has made it through two world wars, the Great Depression, the global financial crisis, and those initial COVID-19 years. That rock-solid reputation and balance sheet have served it well, and that provides a great reason to believe it can make it through today's financial challenges as well.
This anti-Silicon Valley Bank is high-quality and dirt cheap
Jason Hall(Axos Financial): The collapse of Silicon Valley Bank was rooted in its extreme concentration of cash-burning start-ups. Back near the global financial crisis, Axos Financial -- then called BofI Holdings -- faced a similar problem: It was extremely concentrated in jumbo mortgages -- which were too big to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. Moreover, much of its loan portfolio was geographically concentrated in Southern California.
Fortunately, the board hired Greg Garrabrants as its CEO in 2007, who successfully navigated the bank through the financial crisis and recession, and then led it on a decade-long period of steady expansion and diversification. Today, only 25% of its loan portfolio is jumbo mortgages, and 90% of its loans are either variable-rate or hybrid, meaning its loans are steadily generating higher interest income as rates increase. And on the deposit side, 88% of deposits are insured by the Federal Deposit Insurance Corp. (FDIC), meaning it's highly resistant to the sort of bank run that wiped out SVB Financial. As a matter of fact, as of March 12, its average commercial and consumer deposits have increased 12% this year.
Yet its share prices are down 8% since the FDIC took over SVB, and they have given back all of the gains from January and February. That puts it at less than 8 times forward earnings, and 1.3 times book value. Paying these prices anytime in the past decade worked out really well for investors. Not only is Axos relatively safe, but it's also very cheap.
The Express to success
Eric Volkman (American Express): Its stock hasn't been dinged over the past month as much as those of regional (or even national) banks. Regardless, payment card giant American Express is still lagging the S&P 500 index since the Silicon Valley Bank blowout. As with many beaten-down financial companies in the wake of that incident, it deserves better.
American Express is not a bank. It is, of course, a facilitator of payment cards and their use, chiefly credit cards. It's what is known in the card world as a closed-loop operator, meaning that it is both the issuer of its branded credit products and the entity processing the transactions made with them. This is in contrast to its open-loop rivals Visa and Mastercard, which act only as processors for the cards bearing their name. The issuers, chiefly banks, are responsible for actually extending the credit to cardholders.
There are numerous pros and cons to each approach; AmEx has historically done an excellent job of maximizing the former.
As both the issuer and processor, one of those advantages is its deep knowledge of its cardholders and their habits. This allows it to create and tailor the many perks it offers regular spenders in its vaunted membership rewards program. The program is a key reason why customers hang on to and use their plastic, and helps makes AmEx's brand as sticky as it has proven to be. Ditto for the prestige of its higher-limit cards.
Plastic is quite the attractive material for consumers these days. The "war on cash" continues to tilt in favor of noncash transactional means, which is a boon for all card companies.
Meanwhile, despite its recent wobbles the global economy has generally been on the rise over the past few years, and people want to spend. AmEx offers them a convenient means to do so, sweetening the deal with those exhaustive rewards. Over the company's lifetime, banks have come and banks have gone while American Express has endured.
Is now the time to seek out the survivors?
There's an old saying that in times of panic, the market will often "throw out the baby with the bathwater" and punish strong companies alongside ones that are legitimately in trouble. That often brief window between when the market makes that mistake and when it corrects it can be a great chance for aggressive investors to find incredible deals. So if you believe Prudential Financial, Axos Financial, or American Express may be among those that should survive this mess, now may be a great time to consider an investment for yourself.
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American Express is an advertising partner of The Ascent, a Motley Fool company. SVB Financial provides credit and banking services to The Motley Fool. Chuck Saletta has positions in Prudential Financial and has the following options: long January 2024 $110 calls on Prudential Financial, short January 2025 $100 puts on Prudential Financial, short January 2025 $85 puts on Prudential Financial, and short June 2023 $110 calls on Prudential Financial. Eric Volkman has no position in any of the stocks mentioned. Jason Hall has positions in Axos Financial, Mastercard, and Visa. The Motley Fool has positions in and recommends Axos Financial, Mastercard, SVB Financial, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
