For investors on the hunt for value, financial stocks may look alluring. This is due to their current downtrodden state following the regional banking crisis from earlier this year.
But tread carefully.
Financial stocks are lagging in 2023, with the Financial Select Sector SPDR ETF (XLF) flat on a year-to-date basis vs a more than 15% gain for the S&P 500. When just looking at regional banks, the underperformance is even worse, with the SPDR S&P Regional Banking ETF (KRE) down 28% so far this year.
Bank stocks can be "value traps," according to a recent research note from BofA Global Research.
However, there are winners even in this bleak scenario: High-quality financial services stocks with strong balance sheets that are undervalued.
How to find the best financial stocks to buy
One way to screen for these top financial stocks is the Morningstar Wide Moat Focus Index, which tracks the lowest-priced companies with competitive advantages that are expected to last more than 20 years into the future.
This index has outperformed U.S. stocks over time: Since its debut in 2007, the index has more than quadrupled compared with a threefold increase in the S&P 500.
Morningstar calls these wide-moat stocks "very rare," as they are the "cream of the crop in terms of the quality and durability of their business models."
We used this index as a jumping off point to find the best stocks to buy in the financial sector, while expanding our scope to find a handful of hiqh-quality blue chip stocks that have impressive fundamental strength.
We also only included stocks that boast consensus recommendations of Buy or better at S&P Global Market Intelligence. The research firm scores analysts' ratings on a five-point scale, with 1.0 being the best (Strong Buy) and 5.0 being the worst (Strong Sell). To make this list, stocks needed a score of 2.5 (Buy) or lower.
With that in mind, here are the best financial stocks to buy.
Data is as of July 10. Analysts' recommendations and other data courtesy of S&P Global Market Intelligence and Morningstar, unless otherwise noted. Stocks are listed by analysts' consensus recommendation, from lowest to highest.
- Market value: $28.1 billion
- Dividend yield: 0.7%
- Analysts' consensus recommendation: 2.18 (Buy)
The company has beefed up its core business with a string of complementary acquisitions, notably Kount, an AI-powered fraud prevention and digital identity solutions company it bought for $640 million in 2021. A year later, it added Midigator, a provider of post-transaction fraud mitigation solutions, to its stable of offerings.
EFX is one of the best financial stocks in terms of price performance, with a quarterly total return (price + dividends) over 15 years that has outpaced the industry: 14.0% annually compared to 10.7%. It also outperformed the broadly diversified Morningstar U.S. Market TR Index, which returned 10.8% a year over the same period.
Notably, "Equifax's star in recent years has been its workforce solutions segment, which is now its largest segment," Morningstar analyst Rajiv Bhatia said in a research note.
Workforce solutions encompass human resources compliance management such as employee onboarding, payroll, tax management, compliance and the like.
The $1.8 billion acquisition of Appriss Insights in 2021 expanded the capabilities of workforce solutions, he said. Appriss provides risk and criminal justice intelligence products and solutions. This information is used for public and workplace safety, law enforcement purposes, corporate investigations, fraud detection and prevention and healthcare sanctioning and credentialing.
Workforce solutions also include income verification, mainly for mortgages, which the analyst said Equifax does not have "meaningful direct competition." He expects EFX to stay in the lead "as the large amount of existing records and the difficulty of convincing employers to share employee information would be too tough for new entrants to overcome."
The analyst expects Equifax to expand its income verification services to auto, card, government services, and employment screening.
- Market value: $104.3 billion
- Dividend yield: 2.9%
- Analysts' consensus recommendation: 1.82 (Buy)
BlackRock (BLK, $696.17) is the world's largest asset manager with $9 trillion in assets under management (AUM) as of the first quarter of 2023. About 80% of its AUM comes from institutional clients, which tend to be more stable than individual investors, according to Morningstar.
As investors flock to passive investments such as index funds and exchange-traded funds (ETFs), BlackRock is well-positioned because passive strategies make up two-thirds of its AUM. Its iShares ETF offerings account for a third of all its managed assets and are the market share leader in the U.S. and globally.
The asset management company is diversified as well: Half of its AUM consists of equity assets, 29% is in fixed income, with money market funds, multi-asset classes and alternatives comprising the rest. BlackRock has clients in more than 100 countries – 62% in the Americas, 29% in Europe, the Middle East and Africa (EMEA), and 9% in the Asia-Pacific region.
According to Morningstar, BlackRock will benefit from an expanding ETF market, improved active fund operations, further adoption of ESG analytics and investing, increased multi-asset and alternatives exposure and continued efforts to use the latest technology.
BLK is looking to expand in the Asia-Pacific region as well. It already has an asset management joint venture in China with Temasek and China Construction Bank, the world's second largest bank, aimed at the Chinese market. Notably, BlackRock has gotten Chinese regulatory permission to be one of the first global asset managers to run a wholly owned mutual fund business in China.
BlackRock is "well-positioned to drive superior long-term net new assets and market share gains across asset classes, distribution channels and geographies," according to a recent research note from Credit Suisse. And this is why BLK will likely remain on lists of the best financial stocks for years to come.
- Market value: $63.4 billion
- Dividend yield: 1.5%
- Analysts' consensus recommendation: 1.82 (Buy)
Intercontinental Exchange (ICE, $113.16) is the parent of the venerable New York Stock Exchange (NYSE), the New York Board of Trade and the Chicago Stock Exchange, among other institutions. It operates a total of 10 exchanges and six clearing houses around the world.
But the company has been diversifying its revenue sources through acquisitions of businesses in mortgage technology and fixed income and data services, as competition among exchanges remains stiff.
In mortgage technology, ICE provides a platform of comprehensive tools for mortgage application up through closing and the secondary market. The fixed income and data services unit offers fixed income pricing, reference data, indices, analytics and execution services plus global credit default swap clearing and multi-asset class data delivery solutions.
ICE is currently planning to acquire the loan origination business of Black Knight for $11.7 billion in a 90% cash, 10% stock deal. This acquisition will boost ICE's position as a provider of end-to-end home mortgage services. However, the Federal Trade Commission (FTC) is suing to block the deal on anti-competitive grounds. The case is ongoing.
The current market volatility and rising interest rates have boosted exchange revenue as trading volume increased in certain products. However, they have also held down the mortgage business as demand softened.
"Given the macro uncertainty and likely continued market volatility, we think investors will have greater appreciation for the defensive earnings profile of the exchanges," according to a recent note from Deutsche Bank.
Intercontinental Exchange is a member of the Morningstar Wide Moat Focus Index, which has outperformed U.S. stocks over time. ICE has also been one of the best financial stocks in terms of price performance, boasting an average annual total return of 14.4% over the past 15 years vs an 11.0% return for the S&P 500.
- Market value: $15.4 billion
- Dividend yield: 0.5%
- Analysts' consensus recommendation: 1.93 (Buy)
Tradeweb Markets (TW, $65.71) was formed in 1996 as an online exchange serving the opaque U.S. Treasuries market. Today, it operates electronic trading platforms for fixed-income products, derivatives and ETFs.
TW remains a leader in electronic trading of fixed-income securities, according to Morningstar. Since most fixed-income trading is still done by phone or chat, Tradeweb's electronic marketplace ensures it has a long runway of growth ahead of it, Morningstar analyst Michael Miller wrote.
He expects Tradeweb to see low double-digit revenue growth for years to come.
However, competition is bound to come as electronic networks become more attractive to traders. "As Tradeweb rolls out new features like automated trade execution and portfolio trading, the cost advantages of electronic trading networks over traditional methods continues to increase," he said. But this transition is still in its early days.
In the current environment of market volatility, TW as a trading platform benefits in the form of increased trading volumes, according to a research note from Deutsche Bank.
In its latest quarterly earnings report, this top financial stock said average daily trading volume hit a record of $1.4 trillion, up 16% from the year prior. This impressive milestone was notched amid strength in European government bonds, repurchase agreements, retail U.S. government bonds and other securities.
Tradeweb launched a new market data service to calculate iNAVs (intraday net asset value) meant to represent a single share of an ETF. BlackRock is the first client for the service. Also, the company is in talks to acquire Yieldbroker, a government bond and derivatives platform for Australia and New Zealand, for AUD 125 million ($83 million).
- Market value: $77.3 billion
- Dividend yield: N/A
- Analysts' consensus recommendation: 1.86 (Buy)
As the first-ever digital payments platform, PayPal Holdings (PYPL, $69.28) continues to be a leader in e-commerce – and one of Wall Street's best financial stocks – since its founding in 2000.
Today, the company has been strengthening its position in the digital payments space through a spate of acquisitions, notably that of mobile payments platform Venmo, and Braintree, which lets businesses accept online payments, both in 2013.
Other acquisitions included Xoom, an international money transfer service to 52 countries, Swedish payment processor Zettle, digital coupons company PayPal Honey, mobile payment startup Paydiant and Card.io, whose software lets cameras capture credit card information.
The investment bank's fintech survey showed that "while PayPal continues to be the dominant mobile payment service with 71% of respondents having used the service in the past 12 months, Cash App and Apple Pay both saw large increases in adoption over the past year reaching 46% and 31% adoption, respectively, up from 31% and 23%, respectively."
However, PayPal is off to a strong start this year despite the weakening macroeconomic environment of persistent inflation and rising interest rates. Net revenue grew by 9% to $7 billion in the first quarter, while total payment volume (TPV) rose by 10% to $354.5 billion.
Earnings per share (EPS) rose by 33% to $1.17 and operating cash flow was $1.2 billion, with free cash flow coming in at $1 billion.
Analysts are expecting steady growth for PYPL's second-quarter results, as well. Current estimates are for EPS to be up nearly 25% year-over-year and revenue to rise 6.9%.
"PayPal shares continue to provide exposure to a unique and scaled two-sided network" with around 400 million users and 35 million merchants on its platform, according to a recent Credit Suisse note.
- Market value: $424.2 billion
- Dividend yield: 2.8%
- Analysts' consensus recommendation: 1.84 (Buy)
JPMorgan Chase (JPM, $145.15) is typically found on lists of the best financial stocks to own, and for good reason. It is the largest bank in the U.S. and among the largest in the world, based on assets. It also found itself becoming arguably the most influential financial institution in America following the spring 2023 regional banking crisis.
In early May, JPMorgan acquired the majority of First Republic Bank's operations at the behest of the Federal Deposit Insurance Corp. (FDIC). The regional bank was collapsing following a bank run that was sparked by the implosion of Silicon Valley Bank and Signature Bank.
"Our government invited us and others to step up, and we did," said JPMorgan Chairman and CEO Jamie Dimon, in a statement.
First Republic is the third failed bank JPMorgan has taken over, following Bear Stearns and Washington Mutual during the financial crisis of 2008. JPM stepping in has helped to defuse bank depositor panics.
These takeovers helped to propel JPMorgan's assets to $3.7 billion at the end of Q1. But above it all is Dimon, who is himself an influential figure in finance.
The bank's namesake, John Pierpoint Morgan Sr., famously locked his Wall Street peers in his study until they agreed to join him in bailing out a panic-stricken financial system in 1907, according to The New York Times. "Not since then has the leader of a single company held such sway over the U.S. financial system," the paper said.
JPMorgan's 10-year total return of 12.2% on average per year has outpaced the industry, which clocks in at 5.5%. Over a 15-year horizon, JPMorgan returned 11.5% on average per year vs 3.1% for the industry.
- Market value: $158.8 billion
- Dividend yield: 2.8%
- Analysts' consensus recommendation: 1.81 (Buy)
Wells Fargo (WFC, $42.32) is one of the country's Big Four banks, along with JPMorgan Chase, Bank of America (BAC) and Citigroup (C). It also has a broad network of retail branches. The bank is one of the largest issuers of credit and debit cards, as well, and is a leader in commercial banking and consumer financial products, according to Morningstar.
The bank also is slowly emerging from its 2016 fake accounts scandal and regulatory punishments in which the Fed imposed a cap on its asset size. "We're already starting to see glimpses of the transition to offense from defense," Morningstar analyst Eric Compton wrote.
These include the launch of several new card products, the advisor count not declining for the first time in years and $2.2 billion of incremental internal investments in 2023. However, a full turnaround could take years.
Despite headwinds, Wells Fargo has the third most deposits in the U.S. after JPMorgan and Bank of America.
Compton believes Wells Fargo still has a wide competitive moat due to cost advantages and the reluctance of most depositors to switch banks. The financial firm has lower costs due to its large scale and breadth of products.
Wells Fargo is large enough to be considered a global systemically important bank, too. The top financial stock is also a member of the Morningstar Wide Moat Focus Index, which tracks the lowest-priced companies with competitive advantages that are expected to last more than 20 years into the future.
- Market value: $130.0 billion
- Dividend yield: 0.7%
- Analysts' consensus recommendation: 1.72 (Buy)
Intuit (INTU, $464.33) is the financial giant behind TurboTax, the do-it-yourself tax filing service and software, as well as QuickBooks, the popular bookkeeping software for small businesses and sole proprietors. It also owns popular email marketing firm, Mailchimp, and credit-scoring firm Credit Karma.
The company has been expanding its total addressable market by offering to do taxes for consumers and small businesses. In this year's Super Bowl, it debuted a commercial that tells people they can "Come to TurboTax and don't do your taxes." Instead, taxpayers will be matched with a tax expert who will prepare and file their taxes in just one meeting.
Intuit is doing the same with QuickBooks by evolving it into a portfolio of expert services available to small businesses. In the second quarter, it launched a free service in which experts guide QuickBook through its new suite of offerings.
With Credit Karma, INTU is adding new services such as users getting tax refunds as quickly as one minute after the IRS accepts their tax returns. This and other new services are aimed at making Credit Karma into a "comprehensive, self-driving financial platform," said Intuit CEO Sasan Goodarzi, on a recent earnings call.
Intuit continues to expect double-digit annual revenue growth for 2023, although it is lower than prior years amid macroeconomic pressures.
Still, INTU is one of the best financial stocks, as evidenced by its consensus Buy rating. Deutsche Bank is among those that has a Buy rating on Intuit, saying the company enjoys higher average revenue per return for TurboTax, driven by its premium offerings such as full service.
What's more, Intuit is a member of the outperforming Morningstar Wide Moat Focus Index.
- Market value: $371.6 billion
- Dividend yield: 0.6%
- Analysts' consensus recommendation: 1.50 (Strong Buy)
Mastercard (MA, $392.16) needs no introduction for anyone with a credit card. It is the second most accepted card in the world, after Visa (V). The card company benefits from a network effect in which the more consumers join the payment network, the more attractive the network becomes to merchants.
Mastercard's business has stayed resilient in the face of a softening economy. In the first quarter, net revenue rose by a higher-than-expected 11% from the prior year.
As a result, BMO Capital Markets raised its estimates and 12-month target price to $442 from $414. The stock is rated Outperform, or the equivalent of Buy.
"Mastercard has yet to observe weakness in consumer spending," according to a recent BMO research note. "We do not anticipate any near-term impact from the announced Department of Justice (DOJ) investigation."
In April, Mastercard received a "civil investigative demand" (CID) from the DOJ's antitrust division about its debit card program. In January, Visa got a CID from the DOJ over its debit card transactions.
Credit Suisse reiterated its Outperform rating on the stock. It also raised its 2023 EPS estimate by a dime to $12.35 and 2024 by 29 cents to $14.72.
"We continue to believe that Mastercard has attractive qualities in the current environment," including its profitability, balanced exposure, ability to grow through moderate recessionary conditions, and other advantages, the research firm wrote in a note to clients.
BMO and Credit Suisse are hardly alone in thinking MA is one of the best financial stocks around. As proof, it is the only name on this list with a consensus Strong Buy rating, according to S&P Global Market Intelligence.
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