Key Takeaways:
A recent Barron's analysis identifies eight financial companies as potential buys ahead of earnings, arguing that the sector is using artificial intelligence to boost profit margins while trading at a discount to tech.
"This looks like the moment to scour for opportunities to buy stocks outside of the highflying data center-driven names," Jacob Sonenshine of Barron's wrote. The analysis points to data from Morgan Stanley strategists showing 40 percent of S&P 500 financial firms have mentioned quantifiable AI-related impacts to their profits.
While the VanEck Semiconductor ETF has surged about 32 percent this year, the S&P 500 financial sector is down almost 6 percent, suggesting a valuation gap. Financials are using AI to reduce reliance on personnel for asset valuation, manage credit, create insurance pricing algorithms, and identify new markets. The report contrasts the high valuations of AI-centric companies like Palantir (PLTR), which trades at a TTM P/E of 190, with the potential in these more traditional firms.
The analysis, citing a screen from 22V Research's Dennis DeBusschere, highlights companies integrating AI that are also likely to beat earnings estimates. The list includes asset manager T. Rowe Price (TROW), Broadridge Financial Solutions (BR), insurance broker Arthur J. Gallagher (AJG), and insurer Allstate (ALL). A separate screen identified firms with strong earnings-beat histories, such as Mastercard (MA), CNO Financial Group (CNO), Federated Hermès (FHI), and Cboe Global Markets (CBOE).
The broader market shows mixed results, with companies like Sherwin-Williams (SHW) seeing shares rise 2 percent after beating Q1 revenue and earnings estimates. The paint manufacturer reported sales of $5.67 billion, up 6.8 percent year-on-year. In the healthcare space, CareDx (CDNA) posted a 39 percent revenue increase and raised its full-year guidance, showing strong growth in specific sectors.
The investment thesis from Barron's suggests that as long as the economy continues to expand, these AI-adopting financial firms can achieve high earnings growth by increasing profit margins. The upcoming earnings reports for this basket of stocks will be a key test of this theory.
This article is for informational purposes only and does not constitute investment advice.
