We recently compiled a list of the 10 Best Financial Services Stocks To Buy According to Analysts. In this article, we are going to take a look at where The Progressive Corporation (NYSE:PGR) stands against the other best financial services stocks to buy according to analysts.
According to the Financial Industry Index, which increased by more than 30% by mid-December and beat the overall market by about 5 percentage points, 2024 was a spectacular year for the financial industry. This growth followed concerns about mid-sized bank collapses in early 2024, which proved to be isolated incidents rather than an issue impacting the industry as a whole.
Meanwhile, as we have mentioned in our article, 10 Best Financial Stocks To Buy According to Hedge Funds, 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.
Amidst the growth, as per EY’s report, the financial services industry is also undergoing a change because of artificial intelligence, particularly generative AI, which boosts productivity, modifications, and innovation. AI is helping banks provide individual solutions and improve risk control while accelerating processes like fraud detection, loan processing, and customer support. Large financial institutions are using AI to lower expenses, improve compliance, and create new products like automated tax compliance and predictive analytics. Nonetheless, issues like data privacy, rules of conduct, and AI’s “black box” decision-making continue to exist. Notwithstanding these obstacles, artificial intelligence is revolutionizing financial services by spreading beyond banking to include wealth management, insurance, and payments.
According to IBM’s report 2024, Generative AI is revolutionizing financial services by improving customer satisfaction and propelling advancements in risk assessment as well as personalized financial solutions. Secondly, the use of hybrid clouds is growing as companies seek to boost compliance, scalability, and efficiency. Thirdly, cybersecurity is still crucial, with growing investment in fraud detection systems as AI-driven threats emerge. Businesses are putting a greater spotlight on sustainability by giving green financial products and ESG initiatives top priority. By utilizing AI technologies such as Watsonx Assistant, customer experience management (CXM) increases customer pleasure and loyalty. Moreover, the use of open banking is growing as a result of APIs’ ability to simplify procedures and provide customers with more control over their data. Secure online transactions are being reinforced by the resurgence of digital currencies and blockchain.
Looking ahead, Deloitte’s 2025 investment management outlook predicts that AI, digital transformation, and changing investor demands will quickly impact the investment management industry in 2025. Low-cost funds are dominant, with active management flourishing within ETFs. Sustainability-focused investments, hybrid funds, and private financing are important growth areas. AI has exceeded expectations and is transforming operations and sales, but companies that are not embracing it quickly could fall behind. Regulatory changes, cybersecurity, and the combination of traditional and alternative assets are examples of growing risks. While some companies may find it difficult to survive in a high-risk, high-reward environment, bold companies that use AI and diversify their products may benefit from these changes. The key to success is scaling innovation and satisfying the need for sustainable, affordable solutions.
On the other hand, Deloitte’s 2025 banking and capital markets outlook report stated 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. It is anticipated that GDP growth will be 1.5% in 2025, and inflation will be approaching the 2% target, presenting a low-growth, lower-rate scenario for US banks. With savings exhausted by March 2024 and debt reaching $17.7 trillion, consumer spending may decline. Net interest margins may be compressed as a result of declining interest rates, with the federal funds rate falling to 350-375 basis points. Noninterest income presents opportunities, but growing salaries and technology expenditures drive up costs. Credit quality may slightly improve but is expected to stabilize. As geopolitical and regulatory uncertainty further complicate the picture, Deloitte observes that weak business investment and higher deposit costs will test banks’ adaptability.
A team of accountants in a boardroom, discussing strategic moves of an insurance company.
Methodology
We sifted through holdings of financial ETFs and online rankings to form an initial list of 20 financial services stocks. From the resultant dataset, we chose 10 stocks with a projected upside potential of over 7% based on analyst price targets, as of January 9. The stocks are ranked according to their upside potential. We also considered hedge fund sentiment around each stock using Insider Monkey’s data for Q3 2024.
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)
The Progressive Corporation (NYSE:PGR)
Upside Potential as of January 9: 12.41%
One of the largest auto insurers in the US, Progressive Corporation (NYSE:PGR) offers specialized lines in addition to private and commercial auto insurance. It currently has over 20 million personal auto policies in effect. The business sells its products directly to consumers via the phone, online, and through independent insurance brokers in the US and Canada. Its premiums are almost evenly split between the agent and direct channels. Through an acquisition in 2015, the company branched out into homeowners insurance and now offers commercial auto products.
The Progressive Corporation (NYSE:PGR), one of the best financial stocks and one of the most successful franchises in the insurance business has consistently generated returns that are at the top of the market. However, the business has seen a great deal of volatility as a result of the recent fluctuations in the auto insurance market.
The Progressive Corporation (NYSE:PGR) had a strong third quarter, with revenue of $19.46 billion, a 27% year-over-year increase, and GAAP EPS of $3.97, $0.08 more than anticipated. The company’s combined ratio of 89% revealed profitability because it paid out less in claims and expenses than it made in premiums. The firm added a record 1.6 million new policies due to significant media investment and strong demand. Strong growth in both direct and agency channels was the result of record-high direct channel applications and improved customer conversions, positioning the company for sustained gains in market share.
JPMorgan increased its price target on The Progressive Corporation (NYSE:PGR) from $251 to $256. Going into 2025, the analyst is still optimistic about business trends in the property and casualty industry and believes that the group will perform better because of its defensive risk profile and consistent firm pricing. In a research note, the analyst warned investors that current valuations, high sentiment, and optimistic earnings expectations “make the upside in stocks less compelling than a year ago.” Due to a favorable perception of margins, the company is most optimistic about personal lines stocks by segment.
Thomas Bancroft’s Makaira Partners was the largest stakeholder in the company from among the funds in Insider Monkey’s database. It owns 603,603 shares worth $153.17 million as of Q3.
Bretton Fund stated the following regarding The Progressive Corporation (NYSE:PGR) in its Q3 2024 investor letter:
“We think The Progressive Corporation (NYSE:PGR) is the most sophisticated auto insurer in the business. It leverages its vast amount of driver data and is usually one of the first in the industry to recognize important shifts in things like driver behavior and collision costs. Progressive was one of the first to raise rates aggressively in 2021 to offset the higher costs from the more frequent car crashes and higher repair costs post-Covid. By raising prices before its competitors did, Progressive lost customers and wasn’t able to grow as fast as it usually does. The rest of the industry has since caught up and increased rates. Progressive’s rates are now comparatively attractive once again, and that’s led to highly profitable growth. Through September 30, its premiums are up 20% over last year, which is great for a low-growth industry like auto insurance. Progressive added 1.5% to the fund this quarter.”
Overall, PGR ranks 4th on our list of the best financial services stocks to buy according to analysts. While we acknowledge the potential for PGR 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 PGR 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.