American International Group Inc (AIG), Bank of America Corp (BAC), Mastercard Inc (MA): Why did Blackrock Advisors Bet Big on These Financial Companies?

In the latest quarter, Blackrock Advisors went shopping for financial stocks. Three of its four big buys are financial stocks of varying types. In general, the financial sector has a positive outlook in 2013 for the simple reason that a recovering economy, along with the boom of the energy sector, are in need of huge amount of capital. I try to briefly analyze each. Although the transactions contained in the 13F of Blackrock may have been made way before the period filing, we can find out if a stock is still worth buying at present by analyzing its current metrics and the latest market trends and outlook.

AIG is progressing financially, but is this enough?

The fund manager increased its stake in American International Group Inc (NYSE:AIG) by 75%. AIG has been surpassing EPS estimates in at least the last 4 quarters by wide margins. In fact, American International Group Inc (NYSE:AIG) exceeded analysts’ estimates by 52% in the latest quarter. In terms of profitability, the company was able to recover from a negative margin in the last quarter in 2012 to 13.88% in the first quarter of the current year. And the outlook is positive, as analysts estimated that its EPS will grow by roughly 12% each year in the next 5 years.

In terms of pricing, the P/E ratio (ttm) based on Finviz data is at a low 11.59. However, over at Yahoo! the ratio of 29.22 is above the industry’s 22, which indicates that American International Group Inc (NYSE:AIG) is relatively overvalued compared to its peers. Moreover, taking growth into the equation, American International Group Inc (NYSE:AIG) has a PEG ratio of 0.95, above its peer’s average at 0.31. The PEG ratio is an indication of valuation that incorporates future growth; a higher value implies a relatively overvalued stock. Meanwhile, American International Group Inc (NYSE:AIG) is more prone to fluctuations relative to the market than its competitors. Its beta of 1.77 according to Macroaxis is above its peer’s average beta of 0.32.

What is worth noticing, though, is its debt level. The debt-to-equity ratio is on a consistent downward trend, from 0.7356 during the first quarter last year to 0.4548 in the same period this year. This shows the increasingly improving financial stance of the company. While this and its recent EPS performance are quite admirable, I need to see more momentum in terms of profitability and earnings with less volatility to consider American International Group Inc (NYSE:AIG) for a long term investment.

Take advantage of the high growth expectations in this company.

Bank of America Corp (NYSE:BAC) is another financial company that Blackrock favored in the first quarter. The fund manager purchased 72% over what it bought in the previous quarter. The bank’s profit margin is in single-digits, but has increased notably from 2.93% in the first quarter of 2012 to 6.39% in the same period of the current year. I must say, however, that the bank’s revenue is quite volatile. During the last two quarters of 2012, the quarterly revenue went down year-over-year by 28% and 25%, respectively. Prior to that, during the quarter ending June 30, 2010, the bank saw an impressive rally of roughly 66%. Overall, it suffered a negative operating cash flow of $13.86 billion last year. Fortunately, the cash flow statement has quickly recovered during this year’s first quarter.

Bank of America Corp (NYSE:BAC) is considered a volatile investment. Its beta, now calculated at 1.92, indicates that it offers greater fluctuations relative to the market and is way past its peer’s average at 0.32. Notwithstanding the high fluctuations and dwindling cash flow statement, analysts expect its EPS to robustly grow by 23% annually in the next 5 years.

In terms of dividends, Bank of America Corp (NYSE:BAC) may be consistent but is lacking in dividend growth. Moreover, the current pricing is at the higher end relative to the industry. Its P/E ratio of 40.19 based on Yahoo! data is way above the industry’s 11.00. But if one takes into account growth, this bank looks cheaper based on a Yahoo! compilation with a PEG ratio (5-year expected) of 0.59, as opposed to Citibank’s 0.70, JP Morgan’s 1.44, and Wells Fargo’s 1.60.

Despite this, Blackrock seemed to have seen a great cycle coming from the bank as shown by consistently high analysts’ expectations on its EPS in the coming quarters. If you wish to take part in this, you may need to wait for a better timing of entry. Bank of America Corp (NYSE:BAC) has had quite a rally, and investors may be thinking of profiting from this–that is when you might want to move. Indeed, you can take advantage of its low forward P/E ratio of 9.95 (based on finviz.com data)–just be ready to swallow the risks that come with significant fluctuations.