2 of the best financial stocks for bold investors?

Barclays signage
Barclays signage

The financial sector remains a challenging area for investors. Big banks such as Barclays (LSE: BARC) have repeatedly disappointed shareholders. But other City firms have proved very profitable buys.

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Shares in FTSE 250 spread betting firm IG Group Holdings (LSE: IGG) have doubled in value over the last five years. However, the firm's stock fell by 5% in early trading today after IG reported "subdued" trading during July and August.

In this article I'll take a look at today's figures from IG Group and explain why I believe both IG and Barclays are a buy at current levels.

What happened in Q1?

IG's global revenue rose by 5.1% to £111.4m during the three months to 31 August. The group reported an impressive 18% increase in the number of active clients during the quarter. However, revenue fell by 1.8% to £55.4m in the UK and Ireland, despite a 24% increase in the number of active clients.

The main reason for this was that IG reduced the amount of gearing available to clients ahead of the EU referendum. This was done to reduce the risk of large and unmanageable client losses. The effect on trading levels was dramatic -- revenue per client fell by 21% in the UK & Ireland.

A quality business

IG's short-term revenue growth will always be linked to market conditions. But the group's long-term track record suggests it's a quality business with a lot to offer investors.

IG reported an operating margin of 42.5% last year and generated a return on capital of 31%. These extremely high figures are consistent with past years' results. They highlight IG's ability to generate big profits from capital invested in its business.

The group ended last year with no debt and cash and short-term investments of £329m. That's enough to cover last year's dividend payment of 31.4p nearly three times over.

As I write, IG shares are trading at 900p. This puts the stock on a 2016/17 forecast P/E of 18.6 with a forecast yield of 3.7%. That's not especially cheap, but earnings per share are expected to grow by 12% next year. I rate IG as a buy at current levels.

A bold banking buy?

Barclays constantly seems to be on the verge of a strong recovery, without ever reaching its destination. Profits have been crushed by massive misconduct fines and PPI compensation payouts, but this process is coming to an end. Barclays is also gradually managing to dispose of its unwanted non-core assets.

Barclays' balance sheet is much stronger than it was five years ago. The bank's core business generated an impressive return on tangible equity of 12.5% during the first half of this year.

This figure was dragged down to 4.8% at group level thanks to losses of £1.5bn on non-core assets. However, I believe these figures highlight the opportunity that's on offer for value investors. Barclay's has a tangible net asset value of 289p per share. That's 76% higher than the current share price of 165p. Adjusted earnings per share are expected to rise by 55% to 17p in 2017, putting the stock on a P/E of just 9.8.

I believe Barclays is a compelling value buy at current levels. The only catch is that investors may need to be patient in order to collect a profit.

Don't rely on financial stocks

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Roland Head owns shares of Barclays. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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