Each January, in the MoneyShow Top Picks report, we survey the leading financial newsletter advisors asking for their top investment ideas for the new year. Here, eight advisors offer their top financial sector ideas for 2023, ranging from niche plays in private equity and business development to fintech leaders and global wealth managers. You can download the full report here, free.
The stock market has not been the only victim of the Fed’s aggressive interest rate hikes this year. Real estate has also taken a beating since most properties are acquired using borrowed money. As a result, alternative asset manager Blackstone (BX) — my Top Pick for aggressive investors for 2023 — has seen its share price lose a third of its value this year.
Simply because a stock is down that much is not a good reason to buy it. But in this case, the pessimism surrounding Blackstone’s real estate and private equity portfolios appear overblown and sets the stage for a strong rally in 2023.
Currently valued at less than 16 times forward earnings, BX is trading at a substantial discount to the S&P 500 Index despite its high forward annual dividend yield of 6% and solid operating results.
On October 20, Blackstone released its fiscal 2022 Q3 results that included a doubling of distributable earnings from its real estate segment compared to the prior year. Its two other primary sources of revenue, private equity and hedge fund solutions, posted declines in distributable earnings. On a GAAP (generally accepted accounting principles) basis, total distributable earning increased more than 30% on a year-over-year basis.
Nevertheless, Wall Street is feeling queasy about Blackstone’s prospects in the year to come. In short, higher interest rates not only suppress real estate values but also make it difficult to find buyers for its private equity holdings since those transactions are usually financed with debt.
Meanwhile, 12 of the 14 investment banking firms that cover BX have it rated as a buy with an average one-year price target near $100. That is 20% above its current share price, suggesting that its recent fade may be due to a large institutional shareholder dumping the stock.
During two days in early December, a total of 29 million shares of BX changed hands which equates to more than double its average daily trading volume. According to my Personal Finance Pro stock screener, BX is severely oversold and could rebound strongly once the current selling spree subsides. That may not happen until the end of the new year, but once it is over BX could rebound quickly in 2023.
Citigroup (C) — a top pick for conservative investors for 2023 — is a sprawling, $85 billion multinational bank with both retail and commercial banking arms. Originally founded in 1812, the bank has more than a 200-year corporate history, having stood the test of time through good times and bad over the centuries.
While not the most exciting or unique business in the world, Citigroup does present a unique value proposition at current levels, making it a steal heading into 2023. During the absolute nadir of the 2020 pandemic-fueled market plunge, practically every publicly traded stock was trading at a major discount to its intrinsic value. March 23, 2020 was the lowest close for US stock market indexes and for many of their respective constituents.
Since that time, the unprecedented uncertainty has had a chance to subside, and many of the largest U.S. banks trade at substantially higher levels than they did during the depths of the pandemic. JP Morgan Chase (JPM) is up 65% from its lowest pandemic close, Bank of America (BAC) has rallied 78%, and Goldman Sachs (GS) has gone meteoric, adding 155%.
Citigroup’s return, however, is nothing to write home about, with the stock up a pedestrian 24% in the nearly three years since that March 23, 2020 closing low.
These years of underappreciation have resulted in a rock-bottom valuation that’s simply too exaggerated to ignore: Shares trade hands for 6.4 times expected 2023 earnings. The stock is priced at less than half its book value, while the price-to-book ratios for JPM, BAC and GS all range between 1 and 1.5.
Income investors will also find something to like with Citigroup shares, which pay a 4.7% dividend yield and have a payout ratio of less than 30%. Such a low payout ratio, a percentage of earnings a company uses to pay its dividend, shows that its payout isn’t just impressive, it’s sustainable.
With legendary investor Warren Buffett showing a vote of confidence in Citigroup as Berkshire Hathaway (BRK.A) began snapping up shares in 2022, investors are also in good company when buying this megabank. As an added bonus, it’s even likely you’ll get in at a better price than the Oracle of Omaha himself, given Citigroup fell with the rest of the market throughout 2022.
There’s simply no reason for Citigroup to be trading for less than half its book value. And as Buffett has often proven, Mr. Market will come to his senses sooner or later.
If 2022 scared you off growth stories, feel free to park your funds in FS KKR Capital Corp. (FSK), which makes a lot of money in the here and now — lending to mid-stage companies. This is not “private equity”. This is private credit, where money goes into another company and then comes out again with interest.
I fell in love with FSK a few years ago at $17. Since then, it’s paid $5 in dividends, handing us a steady 15% annualized yield without once making me worry about either the share price or the cash flow.
I see no indication that the yield is at risk. For one thing, the overwhelming majority of the company’s customers are already profitable. This isn’t venture capital where management makes an educated bet on an unproved business model and hopes it pays off.
These aren’t all-or-nothing transactions. It’s usually more about raising incremental funds to take the business to the next level — which means the odds of default, bankruptcy or other failure are fairly remote.
That’s been true across the business cycle. The overwhelming majority (99.2%) of FSK customers pay their bills. Even if the economy freezes over, the majority of these loans are senior secured obligations, backed with real assets and given special treatment when things go wrong.
Management does its homework and will lend a hand to help underperforming portfolio companies turn their stories around. And management loves the current rate environment, finding opportunities on the yield curve that make it easier to make money on the spread. Most of the loans carry floating rates. Financing fees are climbing.
While the long-term future is never certain, the past decade has demonstrated that FSK will probably find a way to maintain at least a double-digit yield for at least the next year or two.
Lock it in now and don’t worry about that piece of your portfolio for the foreseeable future. As for the long-term exit, book value of $25 gives the stock plenty of upside when we finally get tired of those quarterly checks.
The term “alternative assets” applies to non-publicly traded assets such as privately held companies, venture capital, real estate and commodities. Blue Owl Capital (OWL) was formed via a December 2020 merger of two alternative asset investors, Owl Rock Capital Group and Dyal Capital Partners.
After its May 2021 IPO, Blue Owl then acquired two more alternative asset managers, Oak Street Capital in October 2021 and Ascentium Group in December 2021. Although a combined corporation, the original four companies still operate more or less independently.
Blue Owl is in fast growth mode. September quarter AUM (assets under management) which totaled $132 billion, were up 87% vs. year-ago. Revenues soared 107% to $371 million. I’ve found that, share prices track annual earnings per share (EPS) closer than any other single factor.
For next year, analysts are forecasting 30% EPS growth, powered by a 34% jump in revenues. Why such spectacular growth? According to a recent analyst report, over 80% of Blue Owl’s assets under management can be classified as “permanent capital.” What’s that? Permanent capital does not have to be paid back at any predetermined date, if at all.
Shareholders can only withdraw their investment by selling their shares to someone else. That’s the best kind of cash to have. Why? Blue Owl doesn’t have to be continuously procuring new cash to replace cash coming due to be repaid. For comparison, only about 20% of Blackstone’s net asset value qualifies as permanent.
Blue Owl paid its first quarterly dividend, $0.04 per share, in August 2021. Since then, it has raised its quarterly payout by $0.01/per share in most quarters. Its most recent payout, $0.12 per share in November, was 33% above year-ago.
According to analysts, that trend will continue. They’re expecting quarterly dividends to average $0.15 per share next year and $0.18 in 2024. To put those numbers in perspective, that’s around 25% dividend growth next year and 20% dividend growth in 2024.
Rocket Companies Inc. (RKT) — formerly Quicken Loans — is one of those companies whose stock is under steady accumulation by CEO Jay Farmer and other directors and officers. Rocket is the largest mortgage lender in the United States, having underwritten $342 billion in mortgages so far in 2022.
Shares of Rocket have been crushed as the Fed has aggressively raised interest rates, which have translated into the average 30-year mortgage now being quoted at 6.67% on a national basis. New home and existing home sales have been pressured as a result of the Fed orchestrating a policy designed to bring housing prices down.
Revenue for Rocket is forecast to decline by 31% in 2023 to $4.2 billion and fully explains why the stock has tumbled from its all-time high of $43; the stock bottomed out at $6 in November, 2022, and with the first signs of the Fed looking to moderate the pace of future rate hikes by the end of the first quarter, it and other mortgage-related stocks should catch a bullish bid that leads to outperformance in 2023.
But back to the business of insider activity, CEO Jay Farner has purchased a total of $10.38 million since mid-September of $10.38 million — and that’s just in the past two and a half months.
As of November 25, 2022, Jay Farner owns 5,778,507 shares of RKT with a value of $45 million. When I see this kind of aggressive accumulation in a stock by its CEO, he is exhibiting an extremely high level of confidence in the company’s business model.
The market cap of Rocket Companies is about $941 million, which is more than the typical micro-cap stock, but I wanted to have a pure play on a Fed pivot in a stock that could easily double or triple when the market turns bullish on the sector. And quite frankly, bullish sentiment is just now showing up with the recent price action in shares of RKT.
The stock was trading at $16 a year ago when the Fed began to tighten. Being we are nearing the end tightening cycle; the market will anticipate mortgage rates coming down and home buying and selling activity picking back up.
Investors should get in front of this transition, follow the lead of a CEO who is buying his company’s stock hand over fist and look for a powerful rebound in the share price in the months ahead.
As markets remain under pressure, LPL Financial Holdings (LPLA) could be a winner in 2023. This is a stock that was highlighted to me via our quantitative process. Each day our systems comb through thousands of equities and ranks them via three important criteria: fundamentals, technicals, and institutional support. Let’s unpack those 3 for LPLA.
LPL is one of the largest wealth manager platforms in the US. They provide advisors the technology, research and more to grow their asset management practices. The company sports a $16.5 billion market cap.
The fundamental picture is strong with sales expected to grow nearly 15% to $9.86 billion in 2023. The firm’s EPS is expected to grow to $18.97 per share next year, giving them a forward PE of 10.9. The firm also packs a small dividend, yielding .5%.
The technical picture has been one of outperformance in 2022 with shares gaining 29%. In challenging macro environments, investors can put more focus on their retirement planning.
Lastly, the institutional support is there. The MAPsignals process seeks to identify stocks trading in an unusual manner, indicative of Big Money buying. LPLA has been one of the highest-ranking stocks in our data since February 2022 when the stock was trading at just over $188. As of this writing the stock sits at $206.94.
Here’s why I like LPLA for continued upside. Each week our algorithms rank 20 stocks with the highest scores for fundamentals alongside institutional support.
LPLA made that list 10 times since February, indicating investors are betting on upside in this name. Based on the strong revenue and earnings outlook and institutional support, I believe this company is poised for more upside in 2023.
Bank of America Corp. (BAC) is a leading worldwide financial institution, providing Commercial and Retail Banking, Corporate & Investment Banking, and Asset and Wealth Management.
Our recommendation — Bank of America Corp. 4.00% Floored Floating Rate Non-Cumulative Preferred — recently had an indicated yield around 5%. It’s rated investment grade at Baa3/BBB- with positive outlooks from both Moody’s and Standard & Poor’s.
This 4.00% preferred issue has a floored, floating-rate structure. With LIBOR completely phasing out after June 30, 2023, the dividend rate will remain floored at 4.00% indefinitely.
The issue is callable on any dividend payment date at par plus declared and unpaid dividends. But it’s unlikely to be redeemed at par anytime in the near future, as the structure provides BAC cheap regulatory capital.
My top pick this year for a more growth-oriented idea is Intuit (INTU); the company has a strong mix of businesses and platforms that few other companies can replicate. However, the stock price is down about 39% year-to-date on recession fears. That said, Intuit beat Q1 2023 revenue and earnings per share estimates. Despite a weakened outlook for 2023 because of Credit Karma, Intuit is a market leader with a solid long-term view because of its unique platforms.
Intuit is the company behind the TurboTax software. It also owns Quickbooks. Both are market-leading businesses. TurboTax has high retention rates, while QuickBooks has an estimated 80% market share of small business accounting. Intuit has used its market leadership to acquire and expand into new platforms.
The company bought Credit Karma in late 2020 and followed that up with MailChimp in late 2021. In addition, the firm owns Mint. Total revenue was around $12,726 million in the fiscal year 2022 and about $13,316 million in the last twelve months. Besides recession fears, Intuit has an overhang because it may lose customers to free tax-filing options with the U.S. Internal Revenue Service. However, the number of users of free services is relatively small.
Moreover, Intuit is now more exposed to higher interest rates and a slowing economy through its Credit Karma business. Hence, during economic slowdowns, consumers may not need as many credit cards, loans, insurance, or other personal finance products.
Intuit is focused on growth. It is in the unique position of offering small businesses and self-employed tax, accounting, and marketing software platforms. Although a recession may hinder growth, long-term demand should be resilient. Furthermore, Intuit seeks to grow through B2B bill payments and bill pay functionality. The firm is even exploring offering its platforms to third parties, such as other enterprises.
Surprisingly, Intuit is a dividend growth stock with a Dividend Contender Status. The growth rate is in the teens, but the dividend yield is low at ~0.81%. The stellar payout ratio of around 25% provides confidence about future increases and dividend safety.
Intuit is rarely undervalued, often trading at a P/E ratio of 30X to 40X. But now, it is relatively cheap, with an earnings multiple of 28X. Investors are getting a market leader that will likely grow at a solid clip over the long term.