With the KBW Nasdaq Bank stock Index dropping 17% over the past year, now may be a good time to look at stocks in the financial sector.
As of year-end 2022, the average financial-services stock covered by Morningstar was about 10% undervalued compared to its fair value estimates. About 45% of the financial-services stocks covered by the firm were undervalued, with under-valuations most common among credit services firms and banks.
Here’s a Morningstar list of three top undervalued stocks in the sector, in alphabetical order.
Berkshire Hathaway (BRK.B), the Warren Buffett-led conglomerate: Morningstar analyst Greggory Warren assigns the company a wide moat (durable competitive advantage) and puts fair value for the stock at $370. It recently traded at $311.
“Berkshire, owing to its diversification and its lower overall risk profile, offers one of the better risk-adjusted return profiles in the financial-services sector,” he wrote in a commentary.
The company “remains a generally solid candidate for downside protection during market selloffs,” Warren said.
“We are impressed by Berkshire's ability in most years to generate high-single- to double-digit percentage growth in book value per share, comfortably above our estimate of its cost of capital.”
Also, “it will take some time before the firm finally succumbs to the impediments created by the sheer size and scale of its operations.”
Blackstone (BX), the world’s largest alternative asset manager: Warren gives the company a narrow moat and puts fair value for the stock 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 firm, we are likely to reduce our fair value estimate slightly to adjust for weaker flows in the near term than we had been previously projecting,” he wrote in a commentary.
“We view Blackstone as being moderately undervalued relative to our revised fair value estimate.”
Further, “we consider Blackstone to be the pre-eminent alternative asset manager,” Warren said. “The company has scale in each of its four business segments: private equity, real estate, credit & insurance, and hedge fund solutions.”
Citigroup (C), the big bank: Morningstar analyst Eric Compton assigns the company no moat and puts fair value for the stock at $75. It recently traded at $52.
“Citigroup is in the middle of a major turnaround and remains a complex story,” he wrote in a commentary. “The bank is working through consent orders from regulators, selling off its international consumer operations, and refocusing on its wealth unit.”
The upside: “this should make the bank easier to understand and structurally more focused,” Compton said.
“However, Citi will still structurally trail its peers from a profitability standpoint and struggle to out-earn its cost of capital. The wealth space remains as competitive as ever, as does the card space, and we don't see the bank building up a retail presence to rival its peers.”
But, “while Citi's issues are real, we still see room for an improved valuation,” Compton said.
