I have long said that financials have been one of the contrarian opportunities of the moment. I am talking about banks such as Barclays (LSE: BARC) (NYSE: BCS.US) and Lloyds (LSE: LLOY) (NYSE: LYG.US), insurers such as Royal & Sun Alliance and brokers such as Tullett Prebon.
The banks were trashed during the financial crisis, crashing to all-time lows as they piled up a mountain of debt.
But, finally, we are seeing the banks, and indeed the whole economy, sort out their troubles and pull away from the depths of Credit Crunch despair.
The key turning point
As an investor, the key turning point for me was when the banks returned to profitability. I invested in Barclays first as it was one of the first banks to be profitable again, and had a relatively uncluttered balance sheet.
I bought Barclays in 2011, and I have seen my investment nearly double in value. Perhaps the next bank to buy was Lloyds, which is now profitable, and is steadily increasing its profits year on year; its share price has also been rocketing outwards.
The most troubled of the big banks has been RBS, but I feel even this bank is on the verge of profitability, and once it passes this threshold its share price will also be boosted.
Barclays, Lloyds, plus a more left-field choice
After increasing in value steadily, financials have recently fallen. I see this as a buying opportunity, rather than a time to sell. The simple numbers explain why.
Barclays is on a P/E ratio of 9, with a dividend of 6p, increasing to 11p the following year. As the economy improves, I expect both profitability and dividend yield to climb over the next few years. By any measure, Barclays is a bargain.
What about Lloyds? This has a P/E ratio of 13, with a dividend which, like Barclays, is expected to climb in future years. So it looks more expensive, but I think there is greater potential for recovery here, as the company stands to benefit as the housing market, after a terrible slump, is beginning to boom. So Lloyds is also a strong buy.
I would also add a mid-cap bank alternative. Bank of Georgia (LSE: BGEO) is the leading bank in the Eastern European state of Georgia. This bank is, like Barclays, on a P/E ratio of 9. But, as a leading light of the booming Georgian economy, it is growing far faster than any of the UK banks, plus it was largely untroubled by the Credit Crunch. You are basically buying a growth company for a value price. It’s a rather left-field pick, but it is perhaps the most enticing bargain of the lot.