With the KBW Nasdaq Bank stock index falling 17% over the past year, now may be a good time to look at stocks in the financial sector.
At the end of 2022, Morningstar’s hedged median financial services stocks were undervalued by approximately 10% compared to its fair value estimates. About 45% of the financial services stocks covered by the company were undervalued, with undervaluations most common among credit service companies and banks.
Here it is a Morningstar list of the top three undervalued stocks in the sector, in alphabetical order.
Berkshire Hathaway (BRK.B) – Get a free report, the conglomerate run by Warren Buffett: Morningstar analyst Greggory Warren assigns the company a long-lasting competitive advantage, putting the fair value of the shares at $370. It recently traded for $311.
“Berkshire, due to its diversification and overall lower risk profile, offers one of the best risk-adjusted return profiles in the financial services industry,” he wrote in a comment.
The company “remains a strong overall candidate for downside protection during market sell-offs,” Warren said.
“We are impressed by Berkshire’s ability in most years to deliver high single- to double-digit percentage growth in book value per share, comfortably above our estimate of its cost of capital.”
Furthermore, “it will be some time before the company finally succumbs to the impediments created by the size and scale of its operations.”
black stone (BX) – Get a free report, the world’s largest alternative asset manager: Warren gives the company a narrow moat and puts the fair value of the shares at $115. It recently traded at $93.40.
“While there was little in narrow-moat Blackstone’s fourth-quarter results that would alter our long-term view of the company, we are likely to lower our fair value estimate slightly to adjust for weaker cash flows in the near term than anticipated. we had been before. projecting,” he wrote in a comment.
“We consider Blackstone to be moderately undervalued relative to our revised fair value estimate.”
Furthermore, “we view Blackstone as the preeminent alternative asset manager,” Warren said. “The company has scale in each of its four business segments: private equity, real estate, credit and insurance, and hedge fund solutions.”
Citigroup (C.) – Get a free report, the big bank: Morningstar analyst Eric Compton gives no moat to the company and puts the fair value of the shares at $75. It recently traded for $52.
“Citigroup is in the midst of a big turnaround and it remains a complex story,” he wrote in a comment. “The bank is working through consent orders from regulators, selling off its international consumer operations and refocusing on its wealth unit.”
The silver lining: “This should make the bank easier to understand and structurally more focused,” Compton said.
“However, Citi will continue to structurally lag its peers from a profitability standpoint and will struggle to exceed its cost of capital. The wealth space remains as competitive as ever, as is the card space, and we don’t see the bank building a retail presence to compete with its peers.”
But “while Citi’s problems are real, we still see room for an improved valuation,” Compton said.
