Financial stocks could seem like a good investment option when value is what an investor is looking for.
This can be related to their current condition of economic suffering, which is a direct result of the regional financial crisis that happened earlier this year.
Financial stocks are investments in well-known companies that provide consumers with banking, insurance, and credit card services around the world.
Investors would be wise to include financial equities as a key part of their portfolios due to the vital role the financial industry plays in the global economy.
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Nothing written here is financial advice.
We don’t advise holding individual stocks. ETFs and funds are a better option.
This article merely looks at some of the better options.
What are Financial Stocks
Companies offering investment banking, retail banking, lending, insurance, or credit card services are all considered to be part of the financial sector.
Despite the importance of banks to the stock market, it is crucial to remember that they are not the only sort of business to dabble in this field.
Insurance firms, investment firms, financial technology (fintech) startups, and financial services providers are all part of the financial sector. Some of the more well-known subsets in this sector are:
Companies in the financial services sector provide numerous functions, including but not limited to credit card issuing, asset management, and bookkeeping.
Credit reporting agencies and bond rating agencies are two examples of the many auxiliary services that contribute to the success of this sector.
Banks are vital to the economy because they serve as a place for people and businesses to store their money and get credit.
Commercial banks primarily deal with retail clients like individuals and small businesses, while investment banks focus on institutional clients like pension funds, mutual funds and high-net-worth investors.
Businesses that create and implement new financial technologies fall under the umbrella term “fintech.”
Examples of fintech include companies working to improve payment systems and those dedicated to developing cryptocurrency.
Health, life, property, and liability are only some of the insurance categories that are offered and regulated by insurance firms.
Benefits of Investing in Financial Stocks
Strong long-term performance is typical of financial stocks.
The financial sector’s profit growth has accelerated noticeably during the past three decades, outpacing the economy’s total profit growth rate.
Because of this, financial institutions have been able to pay above-average dividends to their shareholders, leading to higher valuations.
Even while there is no guarantee that past performance will ensure future success, looking at historical data can be helpful when assessing investment chances.
There has been a rise in the number of restrictions placed on financial shares since the Great Recession.
The 2008 financial crisis highlighted underlying problems in the global financial system, pushing governments around the world to take regulatory action.
Keeping minimum capital at increased levels is one such extra measure modern financial institutions must take to protect themselves from the possibility of losses.
The risk they face is lower now than it was in the past because of this phenomenon.
In times of economic recession, the government might step in to help stabilize financial stocks.
The health of the financial industry has far-reaching consequences for the economy as a whole. Therefore, banks can count on targeted help during recessions and other tough economic times.
Many organizations that got into financial trouble during the Great Recession received aid from their respective governments.
When interest rates go up, it’s good for financial stocks. The current level of interest rates is quite near to the record lows seen in the past.
Banks, credit card companies, and other lenders could increase their earnings in the case of an upswing by charging higher interest rates to their customers.
When there is an increase in bond interest rates, insurance companies can make more money off of their fixed-income investments.
Stocks in the banking sector benefit from the fintech industry’s use of new technologies.
Technology developments like blockchain, mobile payment apps, and robo-advisors have had a favourable impact on the stock prices of companies in the financial sector.
These innovations have laid the groundwork for the sector to expand in the future.
Risks of Investing in Financial Stocks
Financial stocks are cyclical and tend to decline as the economy does. When times are tough economically, both consumers and businesses are less likely to borrow money or spend money using credit cards.
This in turn reduces the income that financial institutions bring in. It’s also likely that people will stop paying back their existing debts.
The risk of loan defaults could put a strain on financial statements.
When a borrower defaults on a loan, the lender takes a financial hit and may decide to write off the debt as uncollectible to avoid further losses.
It is important to keep in mind that in the context of a financial institution’s normal operational framework, the frequency with which defaults occur has the potential to increase, putting at risk the organization’s financial stability in the event of a severe economic downturn.
Such a situation occurred in 2008 when the housing bubble burst and sent the economy into a tailspin.
The disruption brought on by new technologies hurts the banking sector.
There is interesting promise for newcomers to the banking sector in the form of fintech technologies.
However, it’s vital to recognize that these innovations may upset long-standing banks and other financial institutions, posing a threat to their survival in the long run.
Profitability in the financial sector may be hampered by government regulation.
There is a lot of regulatory scrutiny in the financial sector, and the government might step in and impose even more measures, like making banks have more capital on hand, if necessary.
Although these measures help make the sector safer, they hurt profitability by making it harder to borrow money for investment or lending.
What are the Best Financial Stocks
Fiserv, Inc. (NASDAQ:FISV)
Financial services company Fiserv, Inc. (NASDAQ:FISV) had its price objective increased by Barclays analyst Ramsey El-Assal to $150 on April 11 from $140.
Investors should consider purchasing shares of Fiserv, Inc. (NASDAQ:FISV) right now because it is one of the finest financial stocks to purchase. Investors have earned a return of 18.71% during the past six months as of April 14th, 2019.
In the last three months of 2022, 65 hedge funds had disclosed holdings in Fiserv, Inc. (NASDAQ:FISV) totalling $4.3 billion. The largest of these investors was Harris Associates, which owned a $1.9 billion stake.
Equifax, whose stock is currently trading at $229.13, is one of the major credit reporting companies in the United States, along with TransUnion and Experian. But it does more than only determine a person’s creditworthiness.
The company has made several strategic acquisitions that have bolstered its core activities, including the 2021 purchase of Kount for $640 million.
Kount is a provider of artificial intelligence (AI)-driven fraud prevention and digital identification solutions.
A year later, the business added Midigator, a provider of post-transaction fraud mitigation solutions, to its roster of offerings.
With a total return (price appreciation plus dividends) every quarter that has consistently outpaced the financial sector average for the past 15 years, EFX stands out as a top performer in terms of price performance.
More specifically, EFX has returned 14.0% annually while the market average is 10.7%. It also outperformed the widely diversified Morningstar U.S. Market TR Index, which returned 10.8% annually throughout the same period.
JPMorgan Chase & Co. (NYSE:JPM)
When it comes to JPMorgan Chase & Co. (NYSE:JPM), investors are optimistic. JPMorgan Chase & Co. (NYSE:JPM) had its price target increased by Goldman Sachs in April, to $172, up from $160, and the firm’s Buy rating was maintained.
The stock of JPMorgan Chase & Co. (NYSE:JPM) is highly recommended by hedge funds.
JPMorgan Chase & Co. (NYSE:JPM) released its financial results for the first quarter of 2023 on April 14.
With an earnings per share of $4.10, the company surpassed analysts’ projections by $0.73. On April 14th, the stock price was up 19.74% from its 6-month low.
There were 100 bullish hedge funds in Q4 2022, with $5.1 billion invested in JPMorgan Chase & Co. (NYSE:JPM). With a $643 million reported position, Greenhaven Associates was the company’s largest investor.
Bank of America Corporation (NYSE:BAC), PayPal Holdings (NASDAQ:PYPL), and Visa Inc. (NYSE:V) are some of the other financial stocks that have received positive recommendations from hedge funds and analysts alongside JPMorgan Chase & Co. (NYSE:JPM).
Block, Inc. (NYSE:SQ)
After the close of business in 2022’s fourth quarter, 70 hedge funds had amassed Block, Inc. (NYSE:SQ) stakes worth $4.2 billion.
In particular, ARK Investment Management declared a $565 million position, making it the company’s largest shareholder.
Profits for the fourth quarter of fiscal 2022 were reported by Block, Inc. (NYSE:SQ) on February 23.
The company’s earnings per share (EPS) came in at $0.22, and its sales was $4.65 billion, up 14% year over year and $56.71 million higher than what Wall Street had predicted. The stock price has risen by 14.52% in the last six months as of April 14th.
Baird maintained its Outperform rating and $92 price target on Block, Inc. (NYSE:SQ) this past April. When ranked against the top financial stocks recommended by hedge funds, this stock comes in at number fourteen.
Bank of America Corporation (NYSE:BAC), PayPal Holdings (NASDAQ:PYPL), and Visa Inc. (NYSE:V) are among the financial sector’s most popular recommendations among analysts and hedge funds.
S&P Global Inc. (NYSE:SPGI)
Currently (as of April 14), shares of S&P Global Inc. (NYSE:SPGI) are trading at a forward dividend yield of 1.03% and have increased in price by 16.97% over the past 6 months. Among the top financial companies available today, S&P Global Inc. (NYSE:SPGI) is ranked #7.
Analyst Jeffrey Meuler from Baird increased his price objective on S&P Global Inc. (NYSE:SPGI) from $393 to $401 on February 10 while keeping the stock’s Outperform rating unchanged.
There were 97 hedge funds long S&P Global Inc. (NYSE:SPGI) with stated positions of $7.8 billion at the end of the fourth quarter of 2022. Among those investors, TCI Fund Management held the largest stake in the company at $3 billion.
The Progressive Corporation (NYSE:PGR)
Profits for the first quarter of fiscal 2023 were announced by The Progressive Corporation (NYSE:PGR) on April 13.
Company earnings per share for the period were $0.66. Progressive Corporation (NYSE:PGR) revenue was $16.11 billion, up 22.22% year over year and $97 million higher than expected.
When it comes to the banking sector, the Progressive Corporation (NYSE:PGR) is a top pick. On April 14th, investors can take comfort in a 12-month gain of 23.91% in the stock price.
BofA’s Joshua Shanker upgraded The Progressive Corporation (NYSE:PGR) to Buy in April and increased his price target for the stock from $178 to $188.
At the end of the fourth quarter of 2022, 71 different hedge funds reported holding shares of The Progressive Corporation (NYSE:PGR).
This shareholding was worth a total of $2.3 billion in market value. On December 31st, Orbis Investment Management’s $455 million stake made it the company’s largest stakeholder.
Wells Fargo & Company (NYSE:WFC)
As of the end of Q4 2022, 87 hedge funds reported holding shares of Wells Fargo & Company (NYSE:WFC). The total of these holdings was $5.5 billion.
The company’s largest stakeholder, Eagle Capital Management, with a $1.1 billion stake as of December 31.
When it comes to Wells Fargo & Company (NYSE:WFC), investors are optimistic. Wells Fargo & Company (NYSE:WFC) had its price objective increased by Richard Ramsden, an analyst at Goldman Sachs, to $49 on April 14.
He had previously set the goal at $46.25. It is one of the top stocks in the financial sector to invest in right now.
American Express Company (NYSE:AXP)
The stock of American Express (AXP) is rising. On April 14th, the share price was up 10.94%, putting the stock at a TTM PE multiple of 16x.
American Express Company (NYSE:AXP) had its price objective decreased by Oppenheimer from $182 to $180 on April 4.
The firm still has an Outperform rating on the stock, though. The company’s stock is ranked #12 on the list of the top financial companies to purchase right now.
There were 71 funds long American Express Company (NYSE:AXP) at the end of Q4 2022, with a total holding value of $26.8 billion. Berkshire Hathaway reported a $22 billion stake, making it the largest shareholder in the company.
The Charles Schwab Corporation (NYSE:SCHW)
The Charles Schwab Corporation (NYSE:SCHW) had its price target reduced to $56 from $61 by Barclays in April, while the firm’s Equal Weight rating was maintained.
We rank the stock as the tenth best financial stock to purchase right now, based on the recommendations of hedge funds.
In addition to a low PE ratio and dividend payments, shares of Charles Schwab Corporation (NYSE:SCHW) are trading at a favourable price.
The stock has a forward dividend yield of 1.97% and a price-to-earnings ratio of 14x as of April 14.
The Charles Schwab Corporation (NYSE:SCHW) had disclosed positions of $8.1 billion at the end of the fourth quarter of 2022, with 74 hedge funds being positive on the stock.
Topping the list with a $1.4 billion stake was GQG Partners, the largest stakeholder.
Citigroup Inc. (NYSE:C)
For the fiscal first quarter of 2023, Citigroup Inc. (NYSE:C) released earnings on April 14. With an earnings per share of $2.19, the company surpassed analysts’ projections by $0.50.
Revenue of $21.45 billion was up 11.78% year over year and $1.39 billion higher than expected by Wall Street analysts.
The price target for Citigroup Inc. (NYSE:C) shares was lowered by RBC Capital on March 24 from $55 to $51, while the firm kept its Outperform rating on the stock.
Forward dividend yield is 4.12% as of April 14th, while the stock price is up 8.26% for the year. When it comes to the banking sector, Citigroup Inc. (NYSE:C) is a top pick.
After the fourth quarter of 2022, 81 hedge funds held shares of Citigroup Inc. (NYSE:C). There were $7.4 billion worth of business shares revealed by these funds.
Berkshire Hathaway holds a $2.49 billion investment in the corporation, making it the largest shareholder as of December 31.
Goldman Sachs Group, Inc. (NYSE:GS)
By the end of Q4 2022, 74 different hedge funds had Goldman Sachs Group, Inc. (NYSE:GS) in their portfolios. About $4.8 billion was invested by these funds in the firm.
As of the end of last year, Eagle Capital Management had the largest stockholding in the firm, valued $1.12 billion.
As of Thursday, April 14th, the price-earnings ratio (PE) for shares of Goldman Sachs Group, Inc. (NYSE:GS) was 11x, meaning that investors had earned a return of 9.85% over the preceding six months. In the opinion of money managers, this stock is now among the finest in the financial sector.
JMP Securities lowered its price objective on Goldman Sachs Group, Inc. (NYSE:GS) from $470 to $460 and kept its Outperform rating on the stock on April 10.
Potential investors in financial stocks would be well-advised to look into a wide range of opportunities, such as private banking for wealth management and diversification, diversified investment funds for portfolio growth, and a wide range of top defensive stocks, consumer staples stocks, and consumer discretionary stocks.
Investing in financial stocks has several potential benefits, such as security, the opportunity to earn dividends, and participation in economic growth.
Financial ETFs provide diversification and ease of investment, making them a practical tool for those who want to acquire exposure to the financial sector without taking on the full risks of investing in individual financial stocks.
Of course, before making any investment, one should do their homework, think about their financial goals and risk tolerance, and then make a decision.
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