These 2 Financial Stocks Are Smart Buys With the economy's reopening, and with it increasing financial transactions, the financial sector is receiving a solid boost. This, coupled with the F...

With the economy's reopening, and with it increasing financial transactions, the financial sector is receiving a solid boost. This, coupled with the Fed's plan to raise interest rates sooner than expected, is helping the shares of Capital One Financial (COF) and Discover Financial (DFS) to rally. So, it could be wise to scoop up these companies' shares. We think they have plenty of upside to offer. Read on.

Even though prolonged low interest rates remain unfavorable for financial companies, particularly banks and insurers, increasing financial transactions with the reopening of economic activities have lately been helping financial stocks attract renewed investor attention. This is evidenced by the Financial Select Sector SPDR ETF's (XLF) 23.9% gains year-to-date compared to the SPDR S&P 500 Trust ETF's (SPY) 14.4% returns.

Furthermore, the Federal Reserve has signaled two interest rate hikes as soon as late 2023, which is a year earlier than anticipated, which should be a boon to the financial sector. These rate increases are expected to bolster financial companies' profit margin. The industry is also expected to grow in the coming months with the integration of advanced technologies in financial transactions. According to The Business Research Company, the global financial services market is expected to grow at a 9.9% CAGR from $20.4 trillion in 2020 to $22.5 trillion in 2021.

Given this backdrop, it could be wise to bet on Capital One Financial Corporation (COF) and Discover Financial Services (DFS). They have been outperforming the broader market this year. Based on the fundamental strength of these companies, we think their shares could advance further in the coming months.

Capital One Financial Corporation (COF)

COF is a diversified financial services holding company that offers a range of financial products and services to consumers, small businesses and commercial clients through branches, internet and other distribution channels. It operates through three segments: Credit Card, Consumer Banking, and Commercial Banking and other. COF is based in McLean, Virginia.

The company paid a $0.40 quarterly dividend per share on May 28, 2021. COF also paid a $10.20 quarterly dividend on June 1 on the outstanding shares of its fixed-to-floating rate non-cumulative perpetual preferred stock, Series E. This move represents its solid financial strength.

COF's income from continuing operations increased 37% sequentially to $4.20 billion for the first quarter, ended March 31, 2021. Its net income grew 30% sequentially to $3.32 billion, while its total assets increased 8% year-over-year to $421.81 billion. Also, its EPS came in at $7.03, up 31% year-over-year.

For the current quarter, ending June 30, 2021, analysts expect COF's EPS to be $4.37, representing a 297.7% year-over-year increase. It surpassed consensus EPS estimates in three of the trailing four quarters. Its annual revenue is expected to rise 5.3% year-over-year to $30.46 billion in 2022. The stock has gained 55.9% year-to-date to close yesterday's trading session at $154.15.

COF's POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

The stock has an A grade for Sentiment, and a B grade for Growth and Momentum. Within the B-rated Consumer Financial Services industry, COF is ranked #5 of 51 stocks.

To see all the additional POWR Ratings for COF (Stability, Value, and Quality), click here.

Discover Financial Services (DFS)

DFS, through its subsidiaries, operates as a digital banking and payment services company in the United States. It operates in two segments: Digital Banking and Payment Services. The Digital Banking segment offers Discover-branded credit cards, and its Payment Services segment operates the PULSE network, an automated teller machine, debit, and electronic funds transfer network. DFS is based in Riverwoods, Illinois.

On May 18, Arab Financial Services and DFS signed a strategic network alliance agreement that is expected to increase the global footprint of both organizations. Matt Sloan, vice president of international markets at DFS said, "By connecting with innovative payment partners like AFS, we are able to provide our cardholders with the global reach and localization they require."

The company's network volume increased 16.2% year-over-year to $115.13 billion for the first quarter, ended March 31, 2021. Its income before taxes grew 104.8% sequentially to $2.08 billion, while its net income increased 99.4% sequentially to $1.59 billion. Also, its EPS came in at $5.04, up 94.6% sequentially.

Analysts expect DFS' EPS to come in at $3.33 for the current quarter ending June 30, 2021, which represents a 377.5% year-over-year increase. It surpassed the Street's EPS estimates in three of the trailing four quarters. The company's revenue is expected to increase 8.6% year-over-year to $2.90 billion for the quarter ending September 30, 2021. The stock has gained 29.1% so far this year to close yesterday's trading session at $116.88.

DFS' POWR Ratings reflect solid prospects. The company has an overall B rating, which translates to Buy in our proprietary ratings system. It also has a B grade for Growth, Momentum, and Sentiment.

Click here to see DFS' ratings for Stability, Value, and Quality as well. DFS is ranked #7 in the Consumer Financial Services industry.

COF shares were trading at $154.36 per share on Wednesday morning, up $0.21 (+0.14%). Year-to-date, COF has gained 57.09%, versus a 15.23% rise in the benchmark S&P 500 index during the same period.

Capital One Financial Corp. (COF) is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock's price is the key approach that he follows while advising investors in his articles.

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