Financial services stocks remain in a precarious position. High borrowing costs, reduced consumer sentiment and skyrocketing loan delinquencies make investing in many conventional financial services stocks a risky proposition.
The risk and reward balance skews even further out of financial services stocks’ favor when you consider that, on the one hand, fixed-income investing still easily yields north of 5% annually. On the other, growth and tech stocks — and even the broad market indices — are offering ever-higher gains with seemingly unlimited upside (until the other shoe drops, that is).
In light of this, why would anyone ever consider sticking with a sector like financial services stocks? They are collectively overvalued from a practical perspective, offer yields well below the risk-free rate and are increasingly exposed to unsteady economic conditions.
However, not all financial services stocks face the same fate. A handful of innovators are rapidly adapting to changing conditions, both consumer and economic and are rapidly setting themselves apart as the top financial services stocks to buy now.
SoFi Technologies (SOFI)
SoFi Technologies‘ (NASDAQ:SOFI) foray into digital banking is reaping dividends despite shares declining over the past year, making it a potential rebound play among financial services stocks to buy now.
Originally launched as a niche lending service, SoFi significantly broadened its scope to include enterprise brokerage solutions and comprehensive banking services such as checking and savings accounts.
It also has niche offerings otherwise inaccessible to retail, like access to Cathie Wood’s ARK Venture Fund (MUTF:ARKVX). This diversification of services not only enriches the customer experience but also stabilizes SoFi’s revenue streams.
Beyond basic offerings, analysts typically state SoFi’s bull case as centering around its innovative approach, which includes accelerating deposit acquisition, automating loan processing and offering a holistic suite of financial products that traditional banks struggle to match.
According to a Truist analyst, “Legacy banks do not and cannot replicate this model,” citing their large-scale operational models, often hindering rapid adaptability.
This lack of ‘institutional inertia’ places SoFi in an excellent position to capitalize on the evolving financial needs of modern consumers and gives investors a cheap option among financial services stocks to buy now.
Root (ROOT)
Root (NASDAQ:ROOT) bucked the wider financial services stocks sector trend as shares popped more than 300% since January. This surge is driven by ongoing excitement around artificial intelligence and an exceptionally robust first-quarter earnings report.
Root uses AI to analyze prospective clients and collect real-time driving data as a digital insurance provider, enhancing premium management and minimizing risk exposure.
Root ended 2023 on a strong note, posting a 31% increase in gross written premiums, reaching $783 million, although there was a slight 1% dip in gross earned premiums to $636 million. Notably, the company halved its net losses to $147 million, marking its most successful year-to-date.
This performance sparked significant analyst interest, with Jefferies notably quadrupling its price target, endorsing Root’s strategy for profitable growth and market expansion.
Likewise, the fiscal year 2024 started on a strong note, recently delivering the third consecutive quarter of positive operating cash flow and improved metrics nearly across the board, though net positive income still remains slightly out of reach.
Markel Group (MKL)
It’s fascinating to consider that Warren Buffett’s Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B), now known for its enormous valuation and robustness, was primarily a financial services stock from the outset. The conglomerate’s core holdings were initially primarily insurance-centric as Buffet built the business, with two of the first major acquisitions including the National Indemnity Company and GEICO.
For those who feel they missed out on Berkshire’s ascent among financial services stocks, Markel Group (NYSE:MKL) presents a similar opportunity, but at a more accessible price of around $1,600 per share.
Under the leadership of CEO Thomas Gayner, Markel operates on a parallel model to Berkshire, reinvesting underwriting profits into a range of equity investments, spanning publicly traded stocks to private company stakes. Dubbed the “Baby Berkshire” approach, the model has been lucrative for Markel, yielding a 475% return over the past two decades.
Despite the stock’s premium pricing, the market often undervalues Markel, focusing too heavily on its conventional insurance underwriting rather than Gayner’s strategic acumen. Likewise, as Markel cleans up its core financial services stock offerings while expanding its Berkshire-lite reach, this company could be a multi-bagger over the next few decades.
On the date of publication, Jeremy Flint held a long position in MKL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.