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These Stocks Are a Value Investor's Dream

The big banks have been among the best-performing large-cap stocks in 2021. Despite record low interest rates driving down their lending margins, they've tapped into other segments like investment banking. Their exceptional operating performance is highlighted by growth in key metrics like earnings per share, which has rivaled that of high-flying technology companies lately.

Goldman Sachs (NYSE: GS) ranks first globally in mergers and acquisitions year to date, and in the second quarter it delivered record revenue in multiple segments. The result has been a soaring share price, up 41% for 2021 so far.

By contrast, Citigroup (NYSE: C) is one of the world's largest retail banks, but it has been scaling back its operations in underperforming markets. The move contributed to a significant Q2 earnings beat -- but the company trades at a discount to its peers while it makes adjustments to its business.

Both banks offer unique reasons to include them in your long-term portfolio, and combined, they provide diverse exposure to the world of banking.

Image source: Getty Images.

Goldman Sachs

Goldman isn't a typical bank. It doesn't lend money to regular people as a core business, and in fact, its consumer banking segment contributed just 2.3% of total net revenue in the second quarter. The company does most of its business in areas centered around the investment world.

Segment

Q2 2020 Net Revenue

Q2 2021 Net Revenue

Growth

Investment banking

$2.65 billion

$3.60 billion

36%

Global markets

$7.17 billion

$4.90 billion

(32%)

Asset management

$2.10 billion

$5.13 billion

144%

Consumer and wealth management

$1.36 billion

$1.74 billion

28%

Total

$13.29 billion

$15.38 billion

16%

DATA SOURCE: COMPANY FILINGS

The global markets segment was the only stain on an otherwise blowout quarter of growth. It was to be expected as Q2 2020 was the deepest part of the pandemic, which drove unprecedented volatility in financial markets. Goldman earns fees based on trading activity, so given that the markets are more tame this year, it's only natural the company would see less revenue in that area.

Asset management more than filled the gap, as the bank drew a 302% benefit from equity investments, buoyed by strong global stock markets. Additionally, investment banking was robust, thanks to the red-hot IPO (initial public offering) market. In the first six months of 2021, companies that went public raised more money than in any full year in history.

The company's overall performance led to $15.02 in earnings per share for Q2, more than 46% better than the $10.23 analysts were expecting. Moreover, full-year 2021 earnings are estimated to be $45.85 per share, representing 85% growth compared to 2020. The stock trades at just 8.1 times these projected earnings at recent prices, which is a discount compared to the SPDR S&P Bank ETF at 10.3 times. It implies Goldman could see 27% upside from here to align with its peers.

Things get even better for investors, with Goldman declaring a 60% increase to its quarterly dividend beginning in Q3, to $2.00 per share -- that's on top of $1 billion in share buybacks completed in the most recent quarter.

At recent prices, Goldman was one of roughly 50 large-cap stocks to gain 40% or more this year, and there's good reason to think it's not done.

Citigroup

Citi breaks its business down into two main areas -- the Global Consumer Bank and the Institutional Clients Group. The consumer side is smaller, but it still made up 39% of total Q2 revenue, highlighting the company's big presence in retail banking. The institutional segment operates in many of the same areas as its investment banking competitors.

The company has had a difficult 12 months on account of some self-inflicted missteps that triggered regulatory woes, not to mention the accidental $893 million discharge of funds on behalf of one of its clients -- $504 million of which has been ruled irrecoverable. As a result, its gains of roughly 11% this year are trailing both the S&P 500 index (about 17%) and the SPDR S&P Bank ETF (almost 19%). Investors are treading carefully, attributing a more conservative valuation to the company's stock compared to its peers.

Entity

Recent Share Price

Tangible Book Value (Per Share)

Price-to-Tangible Book Ratio

Citigroup

$68

$77.87

0.87

Goldman Sachs

$375

$264.90

1.42

DATA SOURCE: COMPANY FILINGS

But there's a new CEO at the helm -- Jane Fraser -- and she's attempting to turn the company around. In the first quarter this year, she announced Citi would exit 13 underperforming markets across Asia, Europe, the Middle East, and Africa in its consumer banking segment, and redeploy those resources into its institutional and wealth businesses instead.

The pivot to a more investment banking-focused organization will take time, and in Q2 Citi saw year-over-year declines in revenue in almost every area, except for the notable 37% growth in its equity markets segment. It's at least one green shoot for the company's efforts.

Still, it delivered $2.85 in earnings per share for the quarter, a 45% improvement on analysts' expectations, driven by a lower cost of credit. It's expected to generate $9.00 in earnings for the full year -- 85% more than in 2020 -- and if it were to deliver, the stock trades at just 7.6 times that projection.

Citi is paying investors handsomely for their patience, returning $4.1 billion to shareholders in Q2 alone in dividends and stock buybacks. It's equivalent to a 3% dividend yield, and it's currently returning as much money to shareholders as possible under Federal Reserve rules.

There's a big capital growth opportunity for the long-term value investor if Citi develops a highly successful institutional segment and improves the consumer business. In the meantime, the company is offering lucrative incentives to hang around -- which could be a win-win for your portfolio.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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