While the six biggest U.S. banks get the most attention from investors, the best financial stocks to buy in 2019 may be lesser-known brand names, according to several investment professionals. "We’re looking for companies that we’re sure are going to be survivors of a financial crisis, not that we’re forecasting one. It’s a long-term safety kind of view," Tom Hancock, manager of the $5.8 billion GMO Quality Fund, told Fortune in a detailed story.
Hancock, Dave Eiswert of T. Rowe Price, Tom Slater of U.K.-based investment firm Baillie Gifford, and Marc Pinto of Janus Henderson, shared their top stock picks in the financial sector with the magazine. These selections include: CME Group Inc. (CME), CBOE Global Markets Inc. (CBOE), U.S. Bancorp (USB), MarketAxess Holding Inc. (MKTX), and TD Ameritrade Holding Corp. (AMTD). It's a diverse group of companies, as illustrated by the table below.
While stocks rallied sharply on Friday, investors' overall view of the markets and economy is increasingly bearish, an environment in which these 5 stocks may thrive.
Bear Market Survivors
- CME: leading operator of options and futures exchanges
- CBOE: exchange operator and originator of the VIX volatility index
- U.S. Bancorp: conservatively-run, risk-averse super regional bank
- MarketAxess: low-cost electronic trading platform for fixed income
- TD Ameritrade: online discount securities brokerage
Significance For Investors
Hancock of the GMO Quality Fund likes U.S. Bancorp for its high cash reserves and the high quality of its loan portfolio. Also, institutions such as U.S. Bancorp are not reliant on profits from securities trading, unlike the big six U.S. banks, so bear markets in stocks or bonds should have less of an impact on them.
Dave Eiswert, who manages the $1.1 billion T. Rowe Price Global Stock Fund, picks CME Group and CBOE Global Markets. "As long as the world's crazy, these stocks work," Eiswert told the magazine. Betting on increased stock market volatility and increased trading volume, he says that both of these major exchange operators will profit since they earn a cut of every transaction.
Chris Smith, who manages the $223 million Artisan Thematic Investor Fund, also likes CME Group, which was his third-largest holding as of September, at 4.8% of the portfolio per Fidelity. One of Smith's big investment themes is "data monetization," and he notes that both CME and Intercontinental Exchange Inc. (ICE), the parent of the New York Stock Exchange (NYSE), are big players. "Over half of their business now is selling data to other research firms that need all that information," he told Business Insider.
Tom Slater is an investment manager and U.S. equity team leader at U.K.-based Baillie Gifford, which had $250 billion under advisory and management as of September, per the firm. Slater calls MarketAxess "really exciting." The company seeks to make low-cost electronic trading as popular with bonds as it is with stocks, and Slater anticipates that bond trading will heat up as interest rates rise.
Marc Pinto is a portfolio manager at Janus Henderson Investors who heads their Opportunistic Growth strategy and co-manages their Balanced and Growth & Income strategies, per the firm. He oversees a total of about $25 billion in assets, per Fortune. Pinto recommends TD Ameritrade, noting that its acquisition of Scottrade is adding value, and he expects more mergers to come. Also, with interest rates rising, the company has swung from running a loss on its clients' deposits to making this segment "modestly profitable," in Pinto's words.
Despite the optimism expressed by the money managers who made these five picks, all of these stocks are still at risk from a steep economic downturn or bear market. At U.S. Bancorp, a recession is bound to push increasing numbers of its borrowers into delinquency or default, and a market sell-off could drag down its stock. Regarding the other four picks, a bear market is likely to depress investor appetites for trading, and that could spread to even these companies' products.