We recently compiled a list of the 9 Best Financial Services Stocks To Buy Now. In this article, we are going to take a look at where Berkshire Hathaway Inc. (NYSE:BRK) stands against the other financial services stocks.
Although there was significant turbulence in the financial markets in August, the state of global financing is still stable. Despite considerable falls in the equities and corporate debt markets, financing conditions have not tightened significantly, suggesting borrowing resilience.
However, following an almost 10% drop, the broad US stock market is still 5% below its peak in July. Similar declines have been seen in European stocks, although there has been some recovery in these markets; the 500 large companies market is up 3% from its August low.
The markets for corporate bonds have also been impacted. Higher-rated corporate bonds saw an increase in risk premiums, but not to the point where it materially affected borrowing conditions. The current market volatility, according to Chris Jeffrey of Legal & General Investment Management, hasn’t affected corporate or household finance conditions significantly. This perspective is supported by the financial conditions index of a major global financial institution, which indicates that while circumstances have tightened since mid-July, they are still historically loose and more accommodating than they were for a large portion of the prior year.
Amidst the financial turbulence, the financial services industry has faced challenges, but it also showed resilience. The long-term outlook for the industry remains positive. As we have mentioned in our article, “25 Biggest Financial Firms in the World,” the financial services industry is expected to rise at a CAGR of 7.7% over the next few years, from $31138.82 billion in 2023 to $33539.52 billion in 2024. In 2023, Western Europe accounted for the largest portion of the financial services market, with North America coming in second. Financial services are transforming as a result of generative AI, which presents chances for creativity and efficiency.
The McKinsey Global Institute (MGI) claims that banks are racing to implement Gen AI and that its full potential can be realized with the correct operational model in place. According to MGI, the use of Gen AI in the global banking market has the potential to generate value of $200 billion to $340 billion per year, or 2.8 to 4.7 percent of industry revenues, primarily through increased productivity. A new study by MGI examined the usage of Gen AI by 16 of the largest financial institutions in the US and Europe, which together manage assets worth close to $26 trillion. According to the study, more than half of the organizations examined have embraced a more centrally driven structure for next-generation AI, even if their current data and analytics architecture is relatively decentralized. Moreover, artificial intelligence, according to EY, is changing financial markets by improving risk management and enhancing customer experience due to its wide range of uses.
The RSM US’s Financial Services Industry Outlook 2024, also notes that the financial services market is quickly evolving, with a focus on responsible AI in insurance. Similar actions are being taken by states as well. For instance, insurance companies are required by the California Consumer Privacy Act to explain how AI is used in pricing and coverage decisions; violation carries hefty fines. Secondly, the number of retail-friendly investment products is also increasing. Retail investors are the focus of growing interest from asset managers, exchanges, and broker-dealers. Finally, the real exposure of financial institutions to CRE maturities is another trend in the financial services industry. Hence, financial institutions analyzing CRE-related risk should conduct a thorough credit risk evaluation.
Methodology:
We sifted through holdings of financial services ETFs and financial media to form an initial list of 20 financial services stocks. Then we selected the 9 stocks that had the highest upside potential. The stocks are ranked in ascending order of the upside potential.
Some big shots in the financial services industry have been left out owing to our methodology since they had negative consensus upside.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A team of insurance professionals in a boardroom overlooking a city skyline.
Berkshire Hathaway Inc. (NYSE:BRK)
Analysts’ Upside Potential: 6.84%
Berkshire Hathaway Inc. (NYSE:BRK.B) operates globally in the insurance, freight rail transportation, and utility areas through its subsidiaries. In addition to operating railroad systems throughout North America, the company offers property, casualty, life, accident, and health insurance as well as reinsurance.
Insurance is the firm’s primary business segment, which is managed by Geico, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group, respectively.
Berkshire Hathaway’s record $276.9 billion cash pile and robust 15.5% growth YoY in operational earnings in the second quarter of 2024 highlight the company’s flexibility and sound financial standing. The company’s various operations demonstrate resilience, including GEICO’s strong insurance performance.
The pre-tax underwriting earnings of Berkshire and its auto insurance, GEICO, grew dramatically year over year. In the second quarter of 2024, the conglomerate announced an 82% year-over-year growth in net underwriting earnings across its insurance and reinsurance companies, totaling $2.3 billion, exhibiting decreased frequency of claims, increased average premiums per auto policy, and improved operational efficiency.
However, GEICO’s policies in force are declining, and the company is repurchasing shares at a slower rate, which may indicate strategic uncertainty or other possible flaws that might impact its business in the future.
In Q2 2024, Berkshire Hathaway’s (NYSE:BRK.B) 13F stock portfolio value dropped to around $280 billion from approximately $332 billion in Q1 2024. The top five holdings, which make up around 73% of Berkshire’s portfolio, are Chevron, American Express, Apple Inc., Bank of America, and Coca-Cola.
Analyst Edward Jones’ James Shanahan said in a research note:
“BRK shares have significantly outperformed financial services peers during 2023, supported by a relatively strong earnings outlook. We continue to expect solid earnings from BRK’s diverse group of operating companies. In our view, however, the current share price reflects these positives,”
The large cash reserves that come particularly from the aforementioned segments give plenty of room for future investments or calculated risks, and it is currently yielding competitive returns due to rising rates. Moreover, Berkshire’s consistently high-profit performance and systematic share repurchase policy point to continued solid foundations.
Hence, it is one of the Best Financial Services Stocks to Buy Now. Analysts are bullish on the stock. The average target price set by analysts is $134.58, which is a 6.84% increase from the current stock price of $440.84.
Overall BRK ranks 9th on our list of the best financial services stocks to buy. While we acknowledge the potential of BRK as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than BRK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.