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Berkshire Hathaway Inc. (BRK): A good stock in the financial services sector to buy now


Berkshire Hathaway Inc. (BRK): A good stock in the financial services sector to buy now

We recently published a list of The 9 best financial services stocks to buy now. In this article, we take a look at the position of Berkshire Hathaway Inc. (NYSE:BRK) compared to other stocks in the financial services sector.

Despite significant turbulence in financial markets in August, the global financing situation remains stable. Despite significant declines in equity and corporate bond markets, financing conditions have not tightened significantly, suggesting resilience in borrowing.

However, after a decline of almost 10%, the broad U.S. stock market is still 5% below its July peak. Similar declines have been seen in European stocks, although there has been some recovery there; the market of the 500 largest companies is up 3% since its August low.

Corporate bond markets have also been affected. Higher-rated corporate bonds have seen risk premiums rise, but not enough to significantly affect credit conditions. The current market volatility has not significantly affected corporate or household financing conditions, according to Chris Jeffrey of Legal & General Investment Management. This view is supported by a major global financial institution’s financial conditions index, which indicates that while conditions have tightened since mid-July, they are still historically loose and more accommodative than during much of last year.

Amid the financial turmoil, the financial services industry has faced challenges but has also shown resilience. The long-term outlook for the industry remains positive. As we mentioned in our article: “The 25 largest financial companies in the world“The financial services industry is expected to grow at a compound annual growth rate of 7.7% over the next few years, from $31,138.82 billion in 2023 to $33,539.52 billion in 2024.. In 2023, Western Europe had the largest share of the financial services market, with North America in second place. Financial services are being transformed by generative AI, offering opportunities 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 right operating model. 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 percent to 4.7 percent of industry revenue, primarily through increased productivity. A new study by MGI examined the use of Gen AI at 16 of the largest financial institutions in the U.S. and Europe, which collectively manage nearly $26 trillion in assets. According to the study, more than half of the organizations studied have adopted a more centrally controlled structure for next-generation AI, even if their current data and analytics architecture is relatively decentralized. In addition, according to EY, artificial intelligence is transforming financial markets by improving risk management and enhancing the customer experience due to its wide range of uses.

RSM US’s Financial Services Industry Outlook 2024 also notes that the financial services market is evolving rapidly, with a focus on responsible AI in insurance. Similar measures are also being taken by states. For example, insurance companies are required to California Consumer Privacy Act to explain how AI is used in pricing and coverage decisions; violations result in heavy fines. Second, the number of customer-friendly investment products is also increasing. Retail investors are the focus of growing interest from asset managers, exchanges and broker-dealers. Finally, the actual exposure of financial institutions to CRE maturities is another trend in the financial services industry. Therefore, financial institutions analyzing CRE-related risks should conduct a thorough credit risk assessment.

Methodology:

We sifted through the holdings of financial services and financial media ETFs to create an initial list of 20 financial services stocks. Then we selected the 9 stocks with the highest upside potential. The stocks are sorted in ascending order of their upside potential.

Due to our methodology, we excluded some heavyweights in the financial services industry because they had a negative consensus on upside potential.

Why do we care about the stocks hedge funds invest in? The reason is simple: Our research shows that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each 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) engages in the insurance, freight railroading and utilities industries worldwide through its subsidiaries. In addition to operating railroad systems throughout North America, the company offers property, personal, life, accident and health insurance, and reinsurance.

The company’s primary business segment is the insurance sector, which is managed by Geico, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group, respectively.

Berkshire Hathaway’s record cash balance of $276.9 billion and robust operating income growth of 15.5% year-over-year in the second quarter of 2024 underscore the company’s flexibility and solid financial position. The company’s various business segments demonstrate resilience, including GEICO’s strong insurance performance.

Pretax underwriting profits of Berkshire and its auto insurer GEICO rose dramatically year-over-year. In the second quarter of 2024, the conglomerate reported 82% year-over-year growth in net underwriting profits of its insurance and reinsurance companies, totaling $2.3 billion, due to lower loss frequency, higher average premiums per auto policy and improved operating efficiency.

However, GEICO’s prevailing policies are declining and the company is repurchasing fewer shares, which could indicate strategic uncertainties or other potential deficiencies that could affect the company’s business in the future.

In the second quarter of 2024, the value of Berkshire Hathaway’s (NYSE:BRK.B) 13F stock portfolio fell to about $280 billion from about $332 billion in the first quarter of 2024. The top five holdings, representing about 73% of Berkshire’s portfolio, are Chevron, American Express, Apple Inc., Bank of America and Coca-Cola.

James Shanahan of analyst Edward Jones said in a research note:

“BRK shares have performed significantly better than comparable financial services companies in 2023, supported by a relatively strong earnings forecast. We continue to expect solid earnings from BRK’s diverse group of operating companies. However, in our view, the current share price reflects these positive aspects,”

The high cash reserves, which come particularly from the aforementioned segments, offer plenty of scope for future investments or calculated risks and are currently generating competitive returns due to rising interest rates. In addition, Berkshire’s consistently high profitability and consistent share buyback policy indicate that the company’s foundation remains solid.

Therefore, it is one of the best stocks in the financial services sector to buy now. Analysts are optimistic about the stock. The average price target of analysts is $134.58, which represents an increase of 6.84% from the current share price of $440.84.

Total BRK 9th place on our list of the best financial services stocks to buy. While we recognize BRK’s potential as an investment, we believe some AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than BRK but trades at less than 5x earnings, read our report on the cheapest AI stock.

READ MORE: $30 trillion opportunity: The 15 best humanoid robot stocks to buy, according to Morgan Stanley And According to Jim Cramer, NVIDIA has “become a wasteland”.

Disclosure: None. This article was originally published on Insider Monkey.

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