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Stocks  | December 20, 2019

Entering 2019, bank stocks were expected to have a good year on Wall Street, as interest rates seemed destined to head higher. Instead, rates fell -- and financials rallied nonetheless. Heading into 2020, investors are digesting an incredible November jobs report and a Federal Reserve that seems unlikely to cut rates again any time soon. The dividend yield of financial stocks is currently higher than the 10-year Treasury yield, which, historically speaking, indicates the financial sector is more likely to outperform the S&P 500 in the coming year. Here are 10 of the best picks in the financial sector, including the best bank stocks to buy, for 2020.

Citizens Financial Group (ticker: CFG)

One of the few returning names from last year's best bank stocks to buy list, holding company CFG owns Citizens Bank, a regional bank offering both consumer and commercial banking services. The stock's fundamentals looked too cheap to pass on last year, and that observation ended up being well-founded: CFG shares gained 35% in 2019 through mid-December. Shares of the conservatively run mid-Atlantic bank still look attractive though, going for 10.8 times earnings and paying a 3.6% dividend. The dividend payout ratio, or the percentage of earnings used to pay the dividend, is just 33%, indicating it's sustainable -- and likely has plenty of room to be hiked. In 2019, CFG raised its quarterly dividend by 12.5%.

Market capitalization: $17 billion

China Life Insurance (LFC)

China Life Insurance is the second-largest insurer in the world's second-largest economy. China Life enjoys firsthand access to one of the most coveted demographics in the world in the burgeoning Chinese middle class, and rising income isn't the only bullish macroeconomic trend for LFC. Life expectancy in China increased from 70.4 years in 1996 to 76.3 years in 2016. As a life insurer, it's always nice when you're selling insurance to ever-healthier populations. LFC is a nice way to add geographic diversity to your portfolio: due to its investments in the rising Chinese stock market, LFC saw profits nearly triple in the first three quarters of 2019, yet it trades at just 16.6 times earnings.

Market cap: $120 billion

Universal Insurance Holdings (UVE)

Named one of U.S. News' 10 best overall stocks to buy for 2020, Florida property insurer Universal Insurance Holdings clearly makes any list of the top stocks to buy in the financial sector. Shares had a rough 2019, losing about 24% on the year at the time this article was written. But like Citizens Financial Group the year before, its sell-off only makes the fundamentals too attractive to ignore. Shares trade for just 8.7 times forward earnings, UVE pays a 2.2% dividend with a 24% payout ratio, and there's almost no long-term debt on the balance sheet. Since November, insider buying has also been unusually robust, another bullish factor helping make UVE one of the best bank stocks to buy for 2020.

Market cap: $970 million

Berkshire Hathaway (BRK.A, BRK.B)

Berkshire Hathaway, in some ways, defies being confined to one sector or another. It's a holding company really, run by the Oracle of Omaha himself, Warren Buffett. Still, Berkshire is more a financial than anything else: Berkshire became a powerhouse largely through insurance, taking in premiums and reinvesting them in undervalued securities. And today BRK does operate partly as a bank, really -- a loan shark for Wall Street, able to charge practically usurious rates of return in exchange for fast cash. It also owns a $240 billion portfolio of securities that includes large stakes in the three most valuable banks in the U.S.: JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC). With about $130 billion in cash for a rainy day while trading at a price-earnings-growth ratio of 0.9, BRK is a steal.

Market cap: $554 billion

JPMorgan Chase & Co. (JPM)

Buffett is almost surely the single best stock-picker of all time, so if he buys stock in your company it's probably: a) a fairly priced or even cheap stock, and b) a very sound, well-run business. The largest bank in the U.S., this isn't JPMorgan's first rodeo as one of U.S. News' 10 best bank stocks to buy either. JPM made the list for 2019, and boy did it earn its spot: including dividends, shares of the mega-bank jumped 45% through mid-December. Alongside Buffett, JPMorgan CEO Jamie Dimon is another living legend on Wall Street, the only remaining big bank CEO who navigated his company through the financial crisis. Dimon is set to stay as CEO through 2023.

Market cap: $433 billion

NMI Holdings (NMIH)

Investors trying to beat the market know it can be difficult without having some truly original insights or taking some risk with lesser known names. That's where NMI Holdings comes in. The parent of National Mortgage Insurance Corp., NMI allows low down payment borrowers to become homeowners when they purchase mortgage insurance from someone like NMIH. NMIH is on the hook if the borrower defaults. Trading at just 14 times earnings, NMI is growing like a weed, with revenue and earnings both expected to increase 24% in 2020. As a smaller company that doesn't pay a dividend, NMIH isn't for everyone, but it's certainly a growth and momentum stock, with shares up 88% in 2019.

Market cap: $2.3 billion

Goldman Sachs Group (GS)

Another repeat member of the best bank stocks to buy list is good ol' Goldman Sachs, which certainly earned its position in 2019, when shares of the investment bank rose 36%. The past year was interesting since it was the first full year with new CEO David Solomon at the reins; former CEO Lloyd Blankfein had been running things since 2006. Despite its impressive rise in 2019, GS still looks like it has more room to run in 2020 and beyond. Its price-book ratio of 1.04 is noticeably low for an investment banker and broker, despite its incredible brand name and sound financials. GS raised its dividend by 47% in 2019, and still has room for further big raises with a payout ratio of just 16%.

Market cap: $81 billion

Square (SQ)

The next financial name to make the cut for 2020 is Square, the digital payments company founded and run by Twitter (TWTR) CEO Jack Dorsey. The only company on this list not currently profitable, SQ is expected to break into the black in 2020. Square has been ravenously growing its top-line for years, however, and analysts expect revenue to grow at least 25% next year. Small businesses and entrepreneurs use Square to turn their iPads into payment terminals, utilize contactless chip readers and generally streamline checkout. Square also owns Cash App, which competes with Robinhood, allowing investors to buy fractional shares, trade stock for free, and easily trade cryptocurrencies like bitcoin.

Market cap: $29 billion

American Express Co. (AXP)

The penultimate pick on this list, credit card giant American Express is the last of the best bank stocks to buy for 2020 that was also a 2019 pick. Investors like Warren Buffett -- who through Berkshire Hathaway owns nearly 19% of American Express -- see value in owning tried-and-true names for the long run. If it ain't broke, don't fix it (and with 30% gains in 2019, nothing's broken about AXP). With the U.S. consumer quite strong, unemployment at 3.5% and AmEx aggressively recruiting businesses to accept its cards, AXP is a great company at a fair price entering 2020. It trades for 16 times earnings.

Market cap: $102 billion

James River Group Holdings (JRVR)

Last and least by market cap is James River Group Holdings, a holding company that offers specialty insurance and reinsurance through its subsidiaries. In October, JRVR announced the early termination of its contracts with Raiser LLC, Uber's (UBER) commercial auto insurance arm. Shares fell 22%, as Raiser was JRVR's single largest customer. That said, the business simply wasn't favorable to JRVR, so the move was actually savvy, especially in the long term. Analysts still expect earnings to rise about 50% in 2020. Shares have bounced back some since the initial kneejerk sell-off, but JRVR stock still has over 20% upside to its pre-announcement levels. This pick is certainly off the beaten path, but worth considering for more enterprising investors.

Market cap: $1.3 billion

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 

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