Since late 2011, the Big Four banks have risen strongly and most even surpassed pre-GFC highs. There may be more room to run with a growing housing market, but are prices stretched when compared to valuations? I'll leave that one to hardcore bank analysts to decide.
As for investors who may want to round out their portfolio with financials stocks that have upside potential, one area would be capital markets. These are where businesses go to fund capital needs, float new companies and manage mergers and acquisitions.
Outside of the Big Four, I would be looking at Macquarie Group Ltd (ASX: MQG) that has a strong reputation in investment banking for getting M&A deals done and overseeing capital raisings for growing companies.
It had a strong net profit recovery in 2013 and is projecting that full year 2014 results will be 40%-45% up on 2013. In the past six months, its share price rose about 15% and currently is $57.77.
In addition to the rise in corporate activity, it is seeing growth in its residential home loan business as it increases its market share in the industry.
Insurance is another area investors should be watching. Insurance Australia Group Limited (ASX: IAG), which is the industry market leader, has agreed to buy the insurance underwriting business of Wesfarmers Ltd (ASX: WES). That will strengthen its market position and add potential earnings to net profit.
Its share price is $5.71 with a PE of 10.7. It has an attractive 6.2% dividend yield.
Other insurers like QBE Insurance Group Ltd (ASX: QBE) and Suncorp Group Ltd (ASX: SUN) are restructuring their businesses to create cost savings and build up capital. These changes can take time, so Insurance Australia Group has the advantage to grow the company without being sidetracked with reworking its business model.
Foolish takeaway
Focusing on market leaders while the economy is improving can help investors take advantage of broad market movements.
