We recently compiled a list of the 8 Best Wide Moat Stocks to Buy According to Analysts. In this article, we are going to take a look at where U.S. Bancorp (NYSE:USB) stands against the other wide moat stocks.
Undoubtedly, global and domestic investors have mastered the art of riding out the highs and lows of the US stock market. They tend to believe that fluctuations in the stock market are short-term, and should be dealt with accordingly.
McKinsey & Company highlighted that, in 2001, the market cap of the companies making up the S&P 500 stood at ~$10 trillion. As of mid-June 2022 (despite the bearish opening), S&P 500 market capitalization touched ~$32 trillion. Also, the mean total yearly returns (including dividends) of the S&P 500 between 1996 to mid-June 2022 was ~9% in nominal terms, or ~6.8% in real terms.
The investors have seen significant fluctuations. S&P 500 saw a strong decline in 2000, 2001, and 2002, with a ~37% decline in 2008 and a ~22% fall in 1H 2022. That being said, between 1996 and mid-June 2022, S&P 500 returns only declined 5 times annually. While there can be significant fluctuations in the US markets, the macroeconomic indicators can help provide a broader overview of the expected performance of equities.
US Fed Rate Cut – It Finally Happened
The decision on the rate cut by the US Federal Reserve was indeed a closely watched one. The apex bank decided to go for a larger 50-bps reduction in interest rates, instead of a more traditional 25-bps rate cut. This decision was more consequential than normal for 2 reasons. Firstly, this rate cut marked the initiation of a long-awaited easing cycle. Therefore, the US Federal Reserve shifted its focus away from the risks related to inflation and towards protecting the labor market and economic expansion.
Secondly, the rate cut decision itself was much more critical and engaging than normal. History suggests that the US Fed provides greater transparency when it comes to decision-making. This means the financial markets are not surprised by the decision as people know what the US Fed is going to do. However, the recent one was not like this, with markets pricing the 25-bps rate cut decision. The move to cut the key rates by 50 basis points should help the US Fed normalize rates more quickly and be ahead of the emergent slowness in the broader labor market. That being said, the US Fed’s forecasts (the dots) don’t reflect this pace continuing beyond September.
The recent report by Russell Investments highlighted that the company expects the US Fed to cut rates by 25 basis points at each of the remaining meetings in 2024. Furthermore, this pace should be sustained into 2025. If the trajectory continues, the US Fed will be down to the company’s expectations of the normal or equilibrium rate of interest of between 3%-3.25% by this time of the next year.
Equity Market Outlook Post Rate Cut
The implications for the rate cut onto equities hang mainly on the fundamental backdrop—i.e., corporate earnings and whether the US economy is heading for a soft or hard landing. In case of a soft landing, Russell Investments believes that the combination of lower rates and resilient fundamentals should benefit select areas of the market such as real estate and small caps. Regarding small caps, in particular, the investment firm expects a ripe environment for skilled active managers to pick quality businesses at more attractive valuations.
In the remainder of 2024 and 2025, the US Fed cuts are expected to have a positive effect on the economy and markets. Analysts at Wells Fargo believe that the global economy should also benefit, as major central banks around the world have already announced the cut rates or will be announcing soon.
Market experts believe that the Fed rate cut expectations have led to the investors rejigging their portfolios and pivoting towards public companies that are interest-rate sensitive. These include dividend companies, telecommunication giants, utilities, and REITs, among others.
Wall Street also believes that the rate cuts should help well-established and financially stable companies to increase their spending and investments, which are likely to reflect in their stock prices in the remainder of 2024 and early 2025.
Our methodology
To list the 8 Best Wide Moat Stocks to Buy According to Analysts, we conducted an extensive online search and sifted through online rankings and VanEck Morningstar Wide Moat ETF. Next, we considered average analysts’ price targets of the selected stocks. Finally, we ranked the stocks according to their potential upside, as of September 21. We also included the hedge fund sentiment around these stocks, as of Q2 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).
An experienced banker on the trading floor, monitoring financial markets in real time.
U.S. Bancorp (NYSE:USB)
Number of Hedge Fund Holders: 43
Analysts’ Average Price Target: 8.93%
U.S. Bancorp (NYSE:USB) is a diversified financial services company, providing lending and depository services, cash management, foreign exchange, and trust and investment management services.
U.S. Bancorp (NYSE:USB) has a wide economic moat, given the cost advantages and switching costs. The acquisition of Union Bank is expected to offer additional revenue growth, expense synergies, and value for shareholders. U.S. Bancorp (NYSE:USB) has a national scale and a unique mix of fee-generating businesses, which includes payments, corporate trust, wealth management, and mortgage banking. Having a complete product portfolio does equate to certain competitive advantages for the bank as a whole.
U.S. Bancorp (NYSE:USB)’s revenue and earnings are likely to be supported by a range of initiatives. It has been focusing on its payments ecosystem, expanding its branch presence, and pursuing new acquisitions and partnerships. Over the past few years, it expanded its footprint in numerous new population centers and has partnered with State Farm. U.S. Bancorp (NYSE:USB) has been making investments in its payments ecosystem, with a focus on winning more software-centric merchant acquiring business. Also, the banking company continues to cross-sell more payments-related services to corporate banking clients and vice versa.
While the credit outlook has stabilized, U.S. Bancorp (NYSE:USB) anticipates fee revenue growth to be driven by payments, trust investment management fees, and capital markets. Moreover, market experts believe that the banking giant should see positive operating leverage in 2H 2024. Looking forward, U.S. Bancorp (NYSE:USB) anticipates steady net interest income and mid-single-digit growth in non-interest income for FY 2024. Also, the bank expects net interest income in the range of $16.1 billion – $16.4 billion.
In 2Q 2024, the company generated $6.9 billion in net revenue as a result of improved linked quarter net interest income, aided by strong deposit growth, and strong momentum in leveraging its diversified fee income platform to improve the relationships.
Morgan Stanley upped their target price on the shares of U.S. Bancorp (NYSE:USB) from $47.00 to $54.00, giving an “Equal-weight” rating on 30th July. As per Insider Monkey’s 2Q 2024 data, the company was part of 43 hedge funds.
Artisan Partners, an investment management company, released its fourth quarter 2023 investor letter. Here is what the fund said:
“Banks were well represented among our top Q4 performers as the Treasury market rally drove big gains in the bank stocks. U.S. Bancorp (NYSE:USB), PNC Financial Services (PNC) and Bank of America—the three banks we hold in the portfolio—were each among our top five contributors to return. When bank stocks sold off in Q1 due to fears of contagion following Silicon Valley Bank’s failure, we took advantage of the market dislocation by purchasing top-10 US banks USB and PNC at what were, in our view, cheap prices. USB and PNC are banks we have known for years. They are well managed and well capitalized. As large banks, they were less impacted by the turmoil that affected smaller institutions as depositors sought the safest places to store their money. The recent rebound is an example of how our approach of investing in out-of-favor businesses can lead to alpha. USB and PNC are not immune from industry-wide headwinds from higher deposit costs, pressured net interest margins and fleeing deposits. However, we did not see these banks having a similar level of risk, with respect to uninsured deposits and unrealized losses, which contributed in varying degrees to the collapses of other banks in March 2023. As investors, we cannot avoid risk. However, we are willing to take risk if we are being compensated appropriately.”
Overall USB ranks 6th on our list of the best wide moat stocks to buy according to analysts. While we acknowledge the potential of USB as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than USB 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.