Recent market turbulence, sparked by concerns over the Iran conflict, has impacted finance stocks, creating a potential buying opportunity. According to market analysis, this downturn presents a “second chance to buy” into a favored finance-focused dividend fund.

Finance Stocks and Inflationary Pressures

Last year, market selloffs were attributed to tariffs, while this year, rising oil prices are the primary concern. Unlike the previous period, identifying potential winners in the current environment is more straightforward: oil stocks have already experienced a surge.

Potential Benefits from Oil Price Volatility

The John Hancock Financial Opportunities Fund (BTO) is positioned to capitalize on two key trends stemming from the oil price increase. Increased volatility in oil prices, regardless of the conflict’s duration, is expected to boost commodities-trading revenue for banks. Furthermore, if oil prices remain elevated, oil producers will likely require financing to expand production.

A Reuters report on March 6th highlighted that US airlines, having largely abandoned fuel-cost hedging programs, may seek options to mitigate the impact of higher oil prices, potentially increasing demand within the financial sector.

BTO’s Performance and Valuation

Despite the broader financial sector’s decline of over 11% this year, BTO has demonstrated resilience, remaining roughly flat on a total-return basis. This relative strength is particularly noteworthy given the challenging market conditions.

Discount to Net Asset Value

Currently, BTO trades at a discount of less than 2% to its net asset value (NAV). However, this discount is considerably larger when considering the fund’s historical valuation, which has averaged a 3.9% premium over the past five years. The fund has fallen from around that premium level in the last six months.

BTO primarily invests in regional banks, which are poised to benefit from improved prospects across the financial sector, particularly those in energy-producing regions.

Focus on US Oil Production

The fund’s portfolio is heavily weighted towards the US, the world’s largest oil producer, accounting for 95% of its holdings. Investing in regional banks allows for diversification within the sector while maintaining a focus on the US market.

The current market conditions present an opportunity to acquire BTO at its 7.7% yield and “larger-than-it-looks” discount, potentially setting investors up for higher income and capital gains as the discount reverts to a more typical premium.

Brett Owens and Michael Foster are contrarian income investors specializing in undervalued stocks and funds within the U.S. markets.

Disclaimer: Trading in financial instruments involves high risks, including the risk of losing all invested capital. Investors should carefully consider their investment objectives, experience, and risk tolerance before trading. Data provided is not necessarily real-time or accurate and should not be used for trading purposes.