2018 should be a good year for financial stocks. Between the GOP tax overhaul and the Fed planning to speed up interest rate hikes, banks and other financial companies should continue to enjoy their rally that they registered in 2017. Moreover, banking stocks should enjoy further growth next year if the Trump administration continues to remove the regulatory burdens that slowed down banks’ growth since the financial crisis. In the meantime, the Financial Select Sector SPDR Fund (NYSEARCA:XLF) is up by 20% since the beginning of the year and many analysts believe that the rally will continue next year as well.
In addition, the financial industry will continue to be disrupted by technology. In the last couple of years, a couple of trends emerged that poise to reshape the industry. Peer-to-peer lending allows people to borrow money without resorting to banks. Many of us have apps in our smartphones that allow to invest and manage finances easier. The latest trend in the industry is the blockchain technology, which should allow people to transfer money internationally without involving third-parties, such as banks or payment services companies. Moreover, banks have embraced the blockchain technology and are developing their own blockchain-based systems.
Nevertheless, finance stocks seem like a good investment opportunity given analysts’ consensus opinion that they will enjoy strong returns in 2018. But the question is which stocks in the sector are the best to invest in. One way to approach this question is to minimize the risk and invest in a finance-focused ETF like the Financial Select Sector SPDR Fund (NYSEARCA:XLF), which would offer exposure to a basked of financial stocks. Another approach it to identify several stocks and analyze each of them individually and a great point to start the search is by looking at financial stocks that hedge funds like to invest in. With this in mind, we have selected five favorite financial stocks among some 650+ hedge funds we track.
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We should mention that blindly following hedge funds into their favorite stocks is not always a good idea for many reasons, such as a higher risk tolerance that smart money can afford due to their much larger size compared to smaller individual investors. Therefore, even the stocks that hedge funds are collectively bullish on require some additional analysis. However, there is a way to use hedge funds’ favorite stock picks and score market-beating returns. At Insider Monkey, we have conducted extensive research into hedge funds’ stock picks and identified an investment strategy, which has returned over 67% since May 2014, beating the S&P 500 ETF (SPY) by over 20 percentage points. The strategy involves our proprietary methodology of identifying the best stocks in the small-cap space that the best-performing hedge funds tracked by us are bullish on. You can read more details about our strategy and download a sample report by accessing this link.
Having said that, let’s proceed to discussing the top five favorite financial stocks among hedge funds in our database. In addition, we will see how their sentiment towards these stocks changed over the last year.
