Morningstar’s 2023 edition of the best companies to own lists 17 firms in the financial services sector that stand out from their competitors and can be good choices for long-term investors.
What makes for a best company to invest in?
Margaret Giles, a Morningstar data journalist, writes in a recent blog post that the companies on the 2023 list have carved wide economic moats (a term coined by Warren Buffett, she notes) that enables them to keep their industry competitors at bay for a long time. Morningstar expects them to produce returns that outweigh their costs for the next 20 years or more.
The strength of their competitive advantages is also either steady or increasing, which bolsters analysts’ confidence in their long-term growth.
Giles writes that a company’s longevity and competitive advantage are inherently tied to sustainability, so Morningstar analysts take into account environmental, social and governance considerations. The best companies’ business models allow them to effectively navigate evolving ESG issues that could materially affect their business.
The best companies on the list also have predictable cash flows, which helps analysts more accurately estimate how much the businesses are worth. These companies also make smart decisions about how they manage and invest their money.
Giles notes that the share prices of many companies on the 2023 list overestimate their real value, so this may not be the right time to buy.
“Even the greatest company can be a bad investment if you overpay,” she says. “Still, we believe these companies are essential for any stock investor’s watchlist.”
Range of Services and Strategies
The financial services sector includes banks, asset managers, financial research and data companies, credit services, investment brokerage firms, stock exchanges and insurance companies.
Just as the services they supply differ, the companies in this sector fend off competition in distinct ways, according to Giles. The most common characteristic among them is that their customers face relatively high hurdles when they want to switch service providers.
Many of these companies are economically sensitive to interest rates, the level of the stock market and the financial health of consumers and businesses affecting results.
See the accompanying gallery for the 17 best financial services companies, according to Morningstar analysts. Year-to-date performance is as of Oct. 12.