We recently compiled a list of the 7 Most Undervalued Financial Stocks To Buy According To Analysts. In this article, we are going to take a look at where XP Inc. (NASDAQ:XP) stands against the other undervalued financial stocks.
The financial industry outperformed the S&P 500, with the Dow Jones U.S. Financial Services Index returning more than 37% in 2024 compared to the S&P 500 index’s return rate of 25%. This growth undermines the mid-sized bank collapses in early 2024, which proved to be isolated events in the broader market.
Meanwhile, as we have pointed out in our article, 10 Best Financial Services Stocks To Buy According to Analysts, the financial services market has expanded notably in the last several years and is expected to grow at a CAGR of 7.2% between 2025 and 2029.
Financial Services Market Outlook
According to Fidelity’s report, the prospects for the financial industry in 2025 seem promising, backed by positive economic expansion in the U.S. The Fed’s rate reduction in the second half of 2024 will improve confidence and lower credit risk. This will ultimately boost lending and deposits while reducing net interest margins.
In 2025, financial services are going to be much more advanced, driven by AI. According to IBM’s 2024 report, Generative AI is revolutionizing financial services by enhancing customer satisfaction, bringing new features in risk management, and personalized financial solutions. Deloitte’s 2025 investment management outlook projects AI and the changing digital landscape to massively impact the investment management industry in 2025.
Whereas, Deloitte’s 2025 banking and capital markets outlook highlights that banks can reinforce their basis for sustainable growth as the banking industry adjusts to a low-growth, lower-rate scenario. Goldman Sachs projects a modest U.S. GDP growth of 2.5% in 2025, while the PCE inflation is expected to be around 2.1%.
The potential risks in the financial industry always exist. In case the economy weakens, some lenders can be exposed to commercial real estate risks and possible non-performing loans. Nevertheless, the new Trump era has started with a lot of optimism and more prospects for mergers and acquisitions ahead.
Our Methodology
We shifted through the Finviz screener to identify stocks in the financial sector that had a forward P/E of less than 15 and a projected upside potential of over 30% based on analyst price targets, as of January 21. The 7 most undervalued financial stocks to buy are ranked in ascending order of analyst upside. These stocks are also popular among elite hedge funds.
Why do we care about what hedge funds do? 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).
A financial professional examining price changes on a stock broker’s trading floor.
XP Inc. (NASDAQ:XP)
Analyst Upside: 79.47%
Forward P/E: 7.72
XP Inc. (NASDAQ:XP) is a leading technology-driven financial services platform in Brazil. The company offers low-fee financial products and services focused on disintermediating traditional financial institutions. XP also develops innovative products and technologies to empower its clients.
The company has shown remarkable growth, with client assets increasing at a 24.3% CAGR since its IPO in 2019, and a 51.3% CAGR since its capital investment in 2012. In Q3 2024, XP Inc.’s (NASDAQ:XP) fixed-income retail business increased by 31% annually, reaching R$938 million. Moreover, the acquisition of Banco Modal S.A. will expand XP’s client base and improve its ability to provide a wide range of financial solutions.
Brazil is expected to add over 6 million new households to its middle class by 2029, as per the Brazilian Chamber of Commerce. XP Inc. is focused on becoming a leader in retail investments and its potential for expansion makes it an appealing investment.
Overall XP ranks 2nd on our list of the most undervalued financial stocks to buy according to analysts. While we acknowledge the potential of XP as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than XP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.
Disclosure: None. This article is originally published at Insider Monkey.
