I happened to read InvestorPlace.com contributor Jeremy Flint’s recent article about undervalued bank stocks. All three names are solid financial institutions worth considering. Jeremy’s piece made me think of non-bank financial stocks to buy.
Banks have hogged the spotlight in 2023 – and not in a good way. The SPDR S&P Bank ETF (NYSEARCA:KBE) is down more than 10% year-to-date, nearly 30% worse than the S&P 500.
However, like my colleague’s quest to recommend three undervalued bank stocks, I thought it made sense to shine a light on some top non-bank financial stocks that don’t take deposits.
To help me come up with my choices, I’m going to lean on the Davis Select Financial ETF (BATS:DFNL), an actively managed ETF from Davis Advisors, an investment firm that dates back to 1969.
It has just 27 holdings, with the top 10 accounting for 58% of its $173 million in net assets. Approximately 45% of the portfolio are invested in bank stocks. I’ll choose three from the other 55%.
Berkshire Hathaway (BRK-B)
Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B,) is the ETF’s second-largest holding with a 7.4% weighting, considerably less than the S&P Financials Index, at 12.79%.
When it comes to financial services, insurance is Berkshire’s biggest moneymaker, accounting for nearly $20 billion of the holding company’s revenues in Q1 2023. While I said I wouldn’t select any bank stocks, Berkshire’s $378 billion equity portfolio holds a $33 billion investment in Bank of America (NYSE:BAC), good for a 13% stake in one of America’s largest banks.
Other non-bank financial stocks in Berkshire’s equity portfolio include a 20.4% interest in American Express (NYSE:AXP), 13.4% of Moody’s (NYSE:MCO), and five large positions (8.5% each) in Japanese trading firms.
With four of the five Japanese firms trading below book value in August 2020, Warren Buffett felt the bet was a good one. He’s turned out to be right once more. As a result, Berkshire is sitting on a three-fold gain from its initial investment.
There are so many reasons to own Berkshire stock. I could probably write 100 reasons it’s a good idea to own BRK.B. As financial stocks go, it can’t be beat.
Rocket Companies (RKT)
DFNL has a 2.41% weighting in Rocket Companies (NYSE:RKT), the Detroit-based digital financial services platform. The S&P Financials Index doesn’t follow RKT.
Rocket investors can choose to see the glass half-full – it’s up nearly 48% year-to-date. Or they can choose to see the glass half-empty – it’s down 58% over the past five years, 117 percentage points worse than the S&P 500.
Although Rocket’s best known for its online mortgage business, the Rocket ecosystem has managed to grow to 27.6 million accounts as of March 31. These account holders generate revenues from Rocket Mortgage, Rocket Homes, Rocket Loans, and Rocket Money. It’s become another SoFi Technologies (NASDAQ:SOFI), only bigger and a more mature business.
Since launching in 1985, Rocket has generated transaction volume of $1.6 trillion from its ecosystem. The lifetime value of a Rocket client is estimated to be over $18,000 and growing.
Business in 2023 has slowed due to higher interest rates affecting the demand for mortgages and homes. The demand is expected to pick up as consumers get acclimated to higher rates. Rocket expects Q2 2023 revenue of $850 million to $1 billion.
Clearly, Davis feels RKT is a nice value play.
Prosus (PROSY)
I try not to include over-the-counter stocks in my recommendation lists but I just couldn’t resist. Prosus (OTCMKTS:PROSY) has a 1.29% weighting. It too isn’t tracked by the S&P Financials index.
Prosus is a Dutch-based e-commerce investor that’s interconnected with Naspers (OTCMKTS:NPSNY), a large South African internet company. That interconnectedness will soon be a thing of the past.
Naspers owns more than 25% of Tencent Holdings (OTCMKTS:TCEHY) – the Chinese internet conglomerate – indirectly through Prosus, which was spun off in 2019 along with the Tencent stake. When Tencent’s market capitalization rose to nearly $1 trillion in 2021, Naspers was forced to move approximately 50% of its shares under Prosus ownership to accommodate South African investment managers.
With the unwieldy cross-holding between the two companies being done away with via a massive share repurchase program by both companies that started in June 2022, Prosus will effectively have its ownership stake in Naspers diluted away by share buybacks. Naspers will then control a majority of Prosus’s votes and hold a 43% economic interest in the holding company.
Prosus has a lot of moving parts. These are the types of hard-to-evaluate companies that I love to follow. Obviously, DFNL sees value in Prosus as well.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
