Investing in Financial Stocks
Did you know the S&P 500 Financial Index has delivered an annualized return of 13.7% in the last 10 years? Fundamentally strong financial stocks can help you beat the average stock market returns. For instance, if you had stayed invested in Goldman Sachs (NYSE: GS) starting from August 2011 through August 2021, you would have earned an annualized return of 16.5%.
Overall, financial stocks tend to be a little more volatile than others in the short term. Investors may use metrics such as Efficiency Ratio, Net Interest Margin, Return on Equity, and Return on Assets to evaluate financial institutions. However, these metrics may not necessarily always help to assess the valuation of stocks.
- Efficiency Ratio: Measures the ability of an organization to use its assets to generate revenues. A few widely used efficiency ratios are Asset Turnover Ratio, Inventory Turnover Ratio, and Receivables Turnover Ratio.
- Net Interest Margin: The difference between the net interest income earned by a financial institution from products like loans and interest paid out to the lenders, depositors, and the holders of Certificates of Deposits (CDs).
- Return on Equity (ROE) and Return on Assets (ROA): ROE helps to measure the ability of an organization to use shareholder’s equity to generate profits. By calculating the ROA, one can determine the profitability of a business relative to its assets. Investors prefer to stay invested in companies that report higher ROE and ROA.
Financial stocks may fall into the categories such as banks, insurance, fintech, financial services, and blockchain and cryptocurrency. Let’s review each in more detail below:
Banks are financial institutions that offer a broad range of services, including checking and savings accounts, loans, and credit cards to both retail customers and businesses. Most banks also offer investment banking services.
Insurance companies are the entities that sell insurance products to individuals and businesses. A few commonly known insurance products are life insurance, health insurance, property insurance, travel insurance, and business insurance.
Fintech is a business/industry that uses advanced digital technologies to streamline or automate the offerings of financial services. The finest example for a fintech company is Paypal (NASDAQ: PYPL).
Financial services refer to a range of activities including but not limited to banking, investing, wealth management, advisory, and insurance. Most universal banks such as JP Morgan Chase (NYSE: JPM), Citigroup (NYSE: C), Wells Fargo (NYSE: WFC), U.S. Bancorp (NYSE: USB), and the Bank of America (NYSE: BAC) offer a wide range of financial services to customers.
Blockchain and cryptocurrency
Blockchain is a system that records information securely and distributes it to the entire network of computer systems on the Blockchain. Cryptocurrency is a virtual currency or a medium of exchange wherein its ownership records are stored in a computerized database using cryptography. It is not possible to counterfeit cryptocurrencies.
In this article, we have reviewed the 5 best financial stocks you can keep on the watchlist.
5 of the Best Financial Stocks
- Bank of America (NYSE: BAC)
- Goldman Sachs (NYSE: GS)
- Citigroup (NYSE: C)
- JPMorgan Chase (NYSE: JPM)
- Berkshire Hathaway (NYSE: BRK.A)
*All data is according to date of publication.
Bank of America (NYSE: BAC)
Bank of America is a financial services holding company in the United States. It offers a wide range of financial services, including investment banking, credit cards, insurance, mortgage services, loans, asset management, and deposits. It is one of the top four banking institutions in the United States.
The share price of Bank of America at the time of publication was $40.14, with a market capitalization of $337.77 billion.
Bank of America is a leader in digital banking services, with over 40 million active users on its digital banking platform. The diversified product profile has been helping the bank to report good revenues every year. The revenues of the bank weren’t impacted much during the coronavirus pandemic because of the superior performance from the segments such as investment banking, asset management, and wealth management.
The commercial banking segment of Bank of America is expected to grow even bigger amid the positive economic conditions that boost employment rates and increase financial activities.
Bank of America makes it onto the list of the best financial stocks because of its diversified product profile, economic tailwinds, and solidified leadership position in digital banking.
Goldman Sachs (NYSE: GS)
Headquartered in New York City, Goldman Sachs is one of the largest investment banks in the world by revenue. It offers services such as asset management, credit cards, commercial banking, securities underwriting, and financial advisory.
Goldman Sachs is expected to play a huge role in facilitating M&A activity during the next few years. Since organizations are actively seeking cost synergies to unlock even more value, we expect that the M&A activities will further increase in the coming years. Goldman Sachs is one of the preferred underwriters for large-scale IPOs. For instance, Goldman Sachs was the leading underwriter for Robinhood’s IPO, one of the largest IPOs in 2021.
Goldman Sachs is likely to be less vulnerable to broader macroeconomic factors like inflation and interest rate changes because of its strong investment banking division.
The best-performing investment banking division, good brand identity, and superior liquidity position make Goldman Sachs a preferred financial stock for long-term investment.
Citigroup (NYSE: C)
Citigroup Inc. is a financial services corporation headquartered in New York City, New York. It offers a gamut of services, including credit cards, retail banking, investment banking, capital markets, advisory, and wealth management.
Jane Fraser, the CEO of Citigroup, has been taking several initiatives to streamline the operations of the bank. For instance, Fraser has taken an initiative to discontinue consumer banking services in 13 international markets that generated poor revenues over a period across Asia, Europe, Middle East, and Africa. This initiative enables Citigroup to focus more on profit centers like the United Kingdom, Hong Kong, UAE, and Singapore.
Citigroup has shifted its focus to segments like Treasury and Trade Solutions, commercial banking, and wealth management, as they are likely to drive growth in the future. It has also invested over $1 billion to curb unsound banking practices and improve internal controls.
The strategic initiatives that help improve operational efficiencies, eliminate unsafe banking practices, and boost revenues make Citigroup a great financial stock to consider for the medium term.
JPMorgan Chase (NYSE: JPM)
JP Morgan Chase & Co offers a wide range of commercial and investment banking services. It is also widely known for services such as brokerage, wealth management, and asset management. JP Morgan offers credit cards under the brand name “Chase’.
JP Morgan is an efficient bank with diversified revenue streams. It has one of the strongest investment banking divisions that facilitate IPOs and M&A activities. The bank is committed to investing in the latest technologies to improve operational efficiencies. According to Jimon Dimon, the CEO of JP Morgan, the bank would allocate a budget of $12 billion every year to implement the latest technologies and acquire fintech companies.
JP Morgan is ahead of its competitors in exploring technologies such as Artificial Intelligence, Machine Learning, Cloud Computing, and Blockchain. Since technology is the biggest disruptor in the banking industry, keeping an eye on the latest technologies and anticipating the technology needs of customers 5-10 years down the line may help JP Morgan outperform its competitors.
You may prefer to keep JP Morgan in your watchlist of financial stocks because of its fortress balance sheet, diversified revenue streams, and commitment to invest in the latest banking technologies.
Berkshire Hathaway (NYSE: BRK.A)
A financial holding company, Berkshire Hathaway is led by the veteran investor, Warren Buffett. The major product lines of Berkshire Hathaway may fall into categories such as insurance, utilities, retail, and finance.
The insurance division contributes around 30% to the total revenues of the organization. The insurance segment is enabling Berkshire Hathaway to have access to cheap capital for making equity investments. Warren Buffet terms this cheap capital as float; float is the money that an insurance company receives in the form of premiums and holds onto until paying it out in claims.
The capital management capabilities of Berkshire Hathaway are top-notch. Greg Abel, the newly-named CEO of the organization, has been with Warren Buffet since 2000. He has been closely associated with Warren Buffet and spearheaded several successful acquisitions for the organization. He is likely to bring great stability to the operations of Berkshire Hathaway.
Berkshire Hathaway has made it to the list of the 5 best financial sector stocks because of the factors such as availability of float, strong insurance business, good capital management capabilities, and diversified product lines.
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Several fundamentally strong bank stocks in the financial services sector are poised to grow in the near term. The diversified product lines help these stocks withstand the short-term market volatility. The five financial stocks reviewed in this article have been reporting steady revenue growth rates and taking initiatives to improve operational efficiencies. Investors who stay invested in these stocks without a short-term price target are likely to see a considerable ROI.
Financial stocks like Visa (NYSE: V), Mastercard (NYSE: MA), Morgan Stanley (NYSE: MS), American Express (NYSE: AXP), and Discover Financial Services (NYSE: DFS) can also deliver good returns to its shareholders.
Financial index funds or financial exchange-traded funds (ETFs) such as Dow Jones U.S. Financial Services Index ETF and Vanguard Financials ETF are also likely to generate steady returns in the long term. Investors who don’t have time to analyze individual financial stocks can invest in ETFs, index funds, and real estate.
Disclaimer: All investments involve the risk of loss. Nothing on this website should be misconstrued as investment advice. Any reference to an investment’s historical or projected performance is not a recommendation or guarantee of profit or desired outcome.