You don’t want to throw out the baby with the bathwater, as the saying goes. That’s generally good advice and applies now to the equity market’s financial sector.
The plunge in bank stocks over the past two weeks has pulled down non-bank financial stocks too. But some of these companies are quite strong, and after the declines, they’re quite undervalued too, according to a commentary by Dave Sekera, senior U.S. market strategist for Morningstar.
DON’T MISS: Big Banks Best Positioned to Weather Crisis: Morningstar
“For investors that invest in individual stocks, this is an opportune time to look for stocks that have been unfairly dragged down with carnage in financial sector,” he wrote.
“For example, many non-bank financials have been caught up in the downdraft with the regional banks. Many have very different business models than the banks and aren’t reliant on deposit funding.”
These Segments May be Stock Winners
He cites investment banks, brokers, asset managers, credit card providers, and financial technology companies as examples.
Sekera lists seven such stocks that are substantially undervalued compared to Morningstar fair value estimates and that have earned moat designations from the firm’s analysts.
A narrow moat means the company has competitive advantages that should last at least 10 years, and a wide moat means it has competitive advantages that should last at least 20 years.
Here’s the list:
BlackRock (BLK), the world’s largest money manager. Moat: wide. Morningstar fair value estimate: $810. Recent quote: $644.
Blackstone (BX), the world’s largest alternative asset manager. Moat: narrow. Morningstar fair value estimate: $115. Recent quote: $82.
Charles Schwab (SCHW), the online brokerage giant. Moat: wide. Morningstar fair value estimate: $70. Recent quote: $56.60.
Discover (DFS), the credit-card company. Moat: narrow. Morningstar fair value: $146. Recent quote: $94.
Fidelity National Information Services (FIS), a provider of payment processing to financial and other firms. Moat: narrow. Morningstar fair value estimate: $83. Recent quote: $51.50.
Goldman Sachs (GS), the investment bank. Moat: narrow. Morningstar fair value estimate: $404. Recent quote: $307.70.
Lazard (LAZ), a financial advisory/asset management firm. Moat: narrow. Morningstar fair value estimate: $52. Recent quote: $33.30.
“Unlike most of its peers, BlackRock, which is at its core a passive investment shop, has been able to offset many of the secular headwinds facing the traditional asset managers with a few tailwinds of its own,” wrote Morningstar analyst Greggory Warren.
With investors looking for passive products, active asset managers that have greater scale, established brands, solid long-term performance, and reasonable fees, “we believe that BlackRock is well-positioned,” he said.
“Schwab has enough access to cash and capital to weather the storm in the financial sector that was unleashed after the collapse of Silicon Valley Bank,” wrote Morningstar analyst Michael Wong.
“The company has access to the Federal Reserve’s Bank Term Funding Program that can provide upward of $200 billion of cash to deal with potential deposit withdrawals from clients. It also had about $40 billion of cash on its balance sheet at the end of 2022.”
The author of this story owns shares of Blackrock, Blackstone and Goldman Sachs.
