Hedge Funds Like These Financial Stocks

With the U.S. economy strong, many financial stocks trading at cheap valuations, and Federal Reserve Chair Janet Yellen recently stating that the case for higher interest rates has ‘strengthened’, many investors are actively looking to invest in financial stocks.

To aid those investors in their research, Insider Monkey has put together a list of some of the smart money’s favorite financial stocks, based on the numbers from the latest round of 13F filings. Without further ado, let’s take a closer look at Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C), Wells Fargo & Co (NYSE:WFC), and American International Group Inc (NYSE:AIG).

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see the details here).

#5 American International Group Inc (NYSE:AIG)

– Number of Hedge Fund Holders (as of June 30): 85
– Total Value of Hedge Fund Holdings (as of June 30): $7.28 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 12.30%

Although the number of funds tracked by Insider Monkey with holdings in American International Group Inc (NYSE:AIG) fell by nine quarter-over-quarter to 85 at the end of June, many smart money investors believe AIG is one of the best stocks on the market today. Not only is AIG a wide-moat dominant insurance company that trades for a price-to-book ratio of just 0.74, but it also pays a 2.15% dividend yield at current prices. As interest rates normalize, so should AIG’s return on capital and profits. As AIG’s profits grow, so should its valuation and its quarterly dividend.

#4 Wells Fargo & Co (NYSE:WFC)

– Number of Hedge Fund Holders (as of June 30): 88
– Total Value of Hedge Fund Holdings (as of June 30): $28.44 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 11.80%

Even though it isn’t the cheapest bank in the sector, Wells Fargo & Co (NYSE:WFC)’s dividend ($0.38 per share every quarter, 3% dividend yield at current prices) is certainly among the most secure and long-term attractive. A bank would certainly have to be very safe and long-term competitive for Warren Buffett’s Berkshire Hathaway to own 479.7 million shares, which amassed 17.5% of its equity portfolio value. Wells Fargo is so attractive, in fact, that Warren Buffett recently petitioned the government to allow Berkshire to own more than 10% of Wells Fargo (Buffett’s ownership percentage of Wells Fargo has increased over time due to Wells Fargo’s buybacks).

#3 Citigroup Inc (NYSE:C)

– Number of Hedge Fund Holders (as of June 30): 97
– Total Value of Hedge Fund Holdings (as of June 30): $8.5 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 6.80%

With a price to book value of 0.66, Citigroup Inc (NYSE:C) is the cheapest stock on our list in terms of book value. Although it might not benefit from rising interest rates as much as its peers due to its more international nature, Citigroup’s profits should nevertheless grow. Analysts expect Citigroup to make $5.19 in profits per share next year, versus the $4.75 per share the bank made in the trailing twelve months. If Citigroup should hit that mark, the bank’s management will have more capital to do buybacks or raise the dividend. 97 elite funds owned shares of Citigroup Inc (NYSE:C) as of the most recent 13-F reporting period, down 4 funds from the previous quarter.

#2 JPMorgan Chase & Co. (NYSE:JPM)

– Number of Hedge Fund Holders (as of June 30): 99
– Total Value of Hedge Fund Holdings (as of June 30): $7.24 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 3.20%

Among some 750 tracked by our team, 99 funds had a bullish position in JPMorgan Chase & Co. (NYSE:JPM) heading into the third quarter, up by two funds from the previous quarter. Hedge funds like JPMorgan due to the company’s solid track record of strong execution and rock-solid balance sheet. For its second quarter, JPMorgan soundly beat analyst estimates with EPS of $1.55 on revenue of $25.21 billion. Analysts were expecting $0.12 per share and $1.05 billion less. Many investors also like JPMorgan’s generous capital return policy. It’s not too often that investors have the opportunity to buy a sector leader that pays a dividend yield of over 2.8% at current prices.

#1 Bank of America Corp (NYSE:BAC)

– Number of Hedge Fund Holders (as of June 30): 102
– Total Value of Hedge Fund Holdings (as of June 30): $5.28 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 3.90%

With 102 funds from our database reporting long positions in the stock at the end of June, Bank of America Corp (NYSE:BAC) is the smart money’s top financial stock pick. Although the stock has experienced many false-hope rallies before, this time could really be different. Given Bank of America’s largely domestic nature, its cheap valuation, and its considerable exposure to the interest rate changes, many investors feel the bank is the best higher-beta play to gain exposure to the upcoming interest rate hikes. As interest rates rise, so should Bank of America’s profits and capital returns to shareholders.

Disclosure: none