Why Now’s a Good Time to Add Financials to Your Portfolio

The stock market has been on a tear over the past year with equity prices continuing to rise. Stock selection mattered little with every sector participating in the market rally. Now the market looks a little tired and may be ready for a sell off during the month of May. How can investors take advantage of dips in the Dow Jones and S&P 500? The answer is by being prepared to step in and buy the dips when quality companies go on sale. One sector that has attractive companies selling at a discount is the financial sector.

Here are a few names that investors should put on their radar.

Financial Select Sector SPDR ETF

One of the safest ways to get invest in the financial sector is by buying the Financial Select Sector SPDR ETF (XLF). Think of an ETF as a basket containing a variety of different stocks. The XLF will give investors exposure to major commercial banks like Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), US Bancorp (USB), and Wells Fargo (WFC). The XLF invests 99.65% of investor money in financial services companies. This financial ETF will allow you to take advantage of the upside moves while limiting your downside risk.

Goldman Sachs (GS)

Long term investors with an appetite for risk may want to buy shares of investment banking giant Goldman Sachs. Goldman is clearly in the government’s crosshairs and the stock has been beaten up over the near term dropping $40 over the past month. At $145 a share, Goldman is trading at levels that the stock hasn’t seen since July of 2009. Shares will continually be under pressure over the next few months but long term investors should be rewarded for their patience. Goldman has an excellent management team that has been able to produce profits in every economic environment. The firm will likely reinvent its image as they face continued scrutiny from the government. One thing is for sure after all of the lawsuits and hearings are over Goldman will go back to doing what they do well. That is making profits and earning money for shareholders.

Bank of America

As the economy continues to improve, Bank of America will be one of the biggest beneficiaries. As unemployment losses subside, the nation’s largest bank will see foreclosures slow down and credit card losses stabilize. Over the next few years, the Countrywide and Merrill Lynch acquisitions will add to the banking giant’s bottom line. Bank of America is currently selling for $17.83 a share. The stock is a bargain at its current levels and would be a steal in the low to mid teens based on the bank’s future earnings power. Bank of America could easily earn $2.00 a share over the next few years which would mean that shares are trading at under nine times 2011’s earnings.

H&R Block (HRB)

While the stock market has been soaring over the past year, shares of H&R Block have been stagnant. H&R Block’s shares are up only 22% over the past year and are actually down 19% year to date. Shares appear to have bottomed out. The tax preparation company just weathered the worst job market in decades. H&R Block should benefit from an improving economy and job market over the next few years. As more Americans return to the workforce, there will be more people needing tax preparation help. This is a solid value play with many analysts bullish on the 2011 prospects of the company.

Two Stocks to Avoid

Finally, while there are some values in the financial sector like the aforementioned stocks; I am not saying all financials are a buy. Be careful with shares of AIG (AIG) and Citigroup for now. AIG is still awash in red ink and selling off valuable properties. The government has yet to unload its huge stake in Citigroup which will likely drive shares downward.

What sectors or stocks do you think investors should be looking to buy?