We recently compiled a list of the 10 Best Financial Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where PayPal Holdings, Inc. (NASDAQ:PYPL) stands against the other best financial stocks to buy according to hedge funds.
According to the Business Research Company, the market for financial services has expanded significantly in the last several years and is further expected to grow at a compound annual growth rate (CAGR) of 7.7% in the next few years.
The year 2024 was remarkable for the financial sector, as seen by the Financial Sector Index, which rose over 30% as of mid-December and outperformed the broader market by almost 5 percentage points. This expansion came after worries over mid-sized bank failures in early 2024, which turned out to be isolated events rather than a problem affecting the entire industry.
As of January 7, 2025, the market’s financial sector produced returns of 5.51% over three years, 9.68% over five years, and 9.49% over ten years. These numbers, however, pale in comparison to the sector’s remarkable success during the previous 12 months, which saw a return of 28.01%.
Looking forward, according to Fidelity’s report, the financial industry’s prospects for 2025 seem promising, backed by consistent economic expansion in the United States. It is projected that the Federal Reserve’s move to rate decreases in the second half of 2024 will boost confidence and lower credit risk. Falling rates have the potential to boost lending and deposit growth while also reducing net interest margins.
As per Fidelity analyst Matt Reed:
“Lower rates boost economic momentum, benefiting banks and payment processors alike.”
Banks that are well-diversified and have solid fundamentals are better equipped to handle a soft landing situation. Sensitive to consumer spending, payment processors are likewise poised for expansion as more accommodating monetary policy and strong consumer activity coincide.
Risks still exist, though. As per the aforementioned report, if the economy weakens, some lenders may face difficulties due to their exposure to commercial real estate and possible nonperforming loans. Nonetheless, financials start 2025 with significant momentum due to a less stringent regulatory agenda following the election and more prospects for mergers and acquisitions.
Michael Kantrowitz, chief investment strategist at Piper Sandler stated:
“I think investors have rotated a little bit out of some of the big tech companies and into the big financial companies,”
He claimed that while a lot of optimism about artificial intelligence (AI) is priced into tech businesses, some investor movement made sense since the rate environment has improved for bank earnings.
Deloitte’s 2025 banking and capital markets outlook report states that banks can strengthen their basis for sustainable growth with creativity and discipline as the banking industry adjusts to a low-growth, lower-rate environment. According to the report, the baseline scenario for economic growth in 2025 is projected to fall to 1.5%, with possible deviations between 1.0% and 1.9% due to slowing consumer spending, greater unemployment, and sluggish business investment. By Q2 of 2024, consumer debt had risen to $17.7 trillion, and by March 2024, savings from the pandemic had been spent, further straining the economy. Inflation is forecast to be around 2%, allowing for three to four rate cuts, bringing the federal funds rate down to 350-375 basis points. Treasury yields are projected to fall, and following two years of inversion, the yield curve may normalize. With the exception of economies that are under pressure, global central banks will likely choose to cut benchmark rates.
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Methodology
We sifted through holdings of financial ETFs and online rankings to form an initial list of 20 financial stocks. From the resultant dataset, we chose 10 stocks with the highest number of hedge fund investors, using Insider Monkey’s database of 900 hedge funds in Q3 2024 to gauge hedge fund sentiment for stocks.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
PayPal Holdings, Inc. (NASDAQ:PYPL)
Number of Hedge Fund Holders: 90
One of the Best Financial Stocks, PayPal Holdings, Inc. (NASDAQ:PYPL), which specializes in online transactions, was separated from eBay in 2015 and offers electronic payment options to both individuals and businesses. By the end of 2023, the firm had 426 million active accounts. Additionally, the company owns the person-to-person payment network Venmo.
PayPal Holdings, Inc. (NASDAQ:PYPL) was able to establish and preserve a competitive edge by building a network of merchants and customers early in the development of e-commerce. In the past, the firm’s expansion has been pushed by the continuous transition to electronic payments and the emergence of e-commerce, which the coronavirus pandemic momentarily worsened. More recently, however, the company has faced significant challenges as the benefits of the pandemic have reversed and new competitors have emerged. In an effort to ease the strain on top-line growth, management has put more of an emphasis on cost reduction and product innovation, with the ultimate goal of moving toward more profitable growth.
In the third quarter of 2024, PayPal Holdings, Inc. (NASDAQ:PYPL)’s net revenues jumped by 6% YoY to $7.8 billion, fueled by an increase in transaction volume and profit growth. Payment transactions rose by 6% to $6.6 billion, while the overall payment volume surged by 9% to $422.6 billion. The operating cash flow grew by 28.20% year over year. Additionally, PayPal repurchased shares, returning $1.8 billion to stockholders.
James Faucette, an analyst at Morgan Stanley, increased his price objective for PayPal Holdings, Inc. (NASDAQ:PYPL) from $76 to $90. According to the firm’s 2025 forecast statement, its attractive payments and processing industry assessment is based on better investor optimism, young consumer preferences, a call for further investment in competitive strengths, more M&A, and reduced regulatory scrutiny.
Ken Griffin’s Citadel Investment Group was the largest stakeholder in the company among the funds in Insider Monkey’s database. It owns 9.06 million shares worth $707.21 million as of Q3.
Artisan Value Fund stated the following regarding PayPal Holdings, Inc. (NASDAQ:PYPL) in its Q3 2024 investor letter:
“Our top contributor was PayPal Holdings, Inc. (NASDAQ:PYPL), a financial technology company that enables digital and mobile payments between consumers and merchants. PayPal was a recent new purchase added to the portfolio in Q2. Better growth in payment volumes and transaction margins during PayPal’s latest quarter offered evidence that the new management team’s efforts are gaining traction. Notably, payment service provider Braintree returned to providing positive transaction margin, branded checkout contributed strongly to payment volume growth, and monetization at Venmo showed progress. Post-COVID, PayPal’s shares had been pressured by intensifying competition, the threat of which was seemingly exacerbated by prior management missteps. Shares traded for under 14X next year’s expected earnings at the time of our initial purchase. This was an attractive entry point to purchase a stake in a business with above-average—and improving—unit economics, a strong balance sheet and consistent free cash flow. Competent new management is already leaning on the company’s strong financial position to maximize the value of these assets.”
Overall, PYPL ranks 7th on our list of the Best Financial Stocks To Buy According to Hedge Funds. While we acknowledge the potential for PYPL to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than PYPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.