If any investor has stood the test of time, it is Warren Buffett, and with good reason. For years, the “Oracle of Omaha” has had a rock-star-like presence in the investing world. His annual Berkshire Hathaway shareholders meeting draws literally thousands of loyal fans who are investors. Known for his long buy-and-hold strategies and his massive portfolio of public and private holdings, Buffett remains one of the preeminent investors in the world.
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With the Federal Reserve pausing the rate hike cycle that started a year and a half ago, but seemingly indicating that at least one more increase in the federal funds rate, the prospect for a recession remains front and center. With both the Nasdaq and the S&P 500 hitting 52-week highs recently, it makes sense for investors to book profits, especially on mega-cap technology stocks, and shift capital to safer ideas.

With some of the incoming economic data still remaining hot, and the potential for more negative inflation data next month, we screened the Berkshire Hathaway portfolio for companies that should benefit from a likely 25-basis-point November hike. Seven top stocks in the beaten-down financial sector fit the bill and all are rated Buy across Wall Street. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Ally Financial

The bank with no buildings may be poised to have a strong second half of 2023. Ally Financial Inc. (NYSE: ALLY) is a digital financial services company that provides various digital financial products and services to consumer, commercial and corporate customers primarily in the United States and Canada. It was formerly known as GMAC and changed its name in May 2010.

Its Automotive Finance Operations segment offers automotive financing services, including providing retail installment sales contracts, loans and operating leases, term loans to dealers, financing dealer floor plans and other lines of credit to dealers, warehouse lines to automotive retailers and fleet financing. It also provides financing services to companies and municipalities for the purchase or lease of vehicles and vehicle-remarketing services.

The Insurance Operations segment offers consumer finance protection and insurance products through the automotive dealer channel and commercial insurance products directly to dealers. This segment provides vehicle service and maintenance contracts and guaranteed asset protection products, and it underwrites commercial insurance coverages, which primarily insure dealers’ vehicle inventory.

The Mortgage Finance Operations segment manages consumer mortgage loan portfolio that includes bulk purchases of jumbo and low-to-moderate income mortgage loans originated by third parties, as well as direct-to-consumer mortgage offerings.

The Corporate Finance Operations segment provides senior secured leveraged cash flow and asset-based loans to middle market companies, leveraged loans and commercial real estate products to serve companies in the health care industry. The company also offers commercial banking products and services. In addition, it provides securities brokerage and investment advisory services.

Investors receive a 4.35% dividend. BMO Capital Markets has a $45 target price on Ally Financial stock. The consensus target is $32.28, and shares closed on Thursday at $27.05.

This stock has backed up recently and is offering the best entry point since late last year, despite posting solid second-quarter results. American Express Co. (NYSE: AXP) provides charge and credit payment card products and travel-related services worldwide. Its products and services include payment and financing products network services accounts payable expense management products and services, and travel and lifestyle services.
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The company’s products and services also include merchant acquisition and processing, servicing and settlement, point-of-sale marketing and information products and services for merchants, and fraud prevention services, as well as the design and operation of customer loyalty programs. It sells its products and services to consumers, small businesses, midsized companies and large corporations through mobile and online applications, third-party vendors and business partners, direct mail, telephone, in-house sales teams and direct response advertising.

Shareholders receive a 1.53% dividend. Morgan Stanley has set a $188 price target, and the consensus target for American Express stock is $181.46. Thursday’s closing share price was $154.71.

Bank of America

Buffett owns a stunning billion shares of this bank, which posted solid second-quarter quarter results. Bank of America Corp. (NYSE: BAC) is a ubiquitous presence in the United States, providing various banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, corporations and governments in the United States and internationally. It operates 5,100 banking centers, 16,300 ATMs, call centers and online and mobile banking platforms.

Bank of America has expanded into several new U.S. markets, with scale across the country positioning it ideally to benefit from accelerating loan growth over the next two years. Moreover, unlike smaller peers, scale allows the bank to increase investment substantially over the next few years without notably jeopardizing returns, driving further market share gains.

The dividend yield here is 3.36%. Oppenheimer’s $49 target price is higher than the $32.95 consensus target. Bank of America stock closed on Thursday at $28.05.

Capital One Financial

This top financial stock has spent years building and maintaining a strong profile and brand with consumers. Capital One Financial Corp. (NYSE: COF) operates as the financial services holding company for the Capital One Bank (USA) and Capital One, which provides various financial products and services in the United States, Canada and the United Kingdom.
Capital One accepts checking accounts, money market deposits, negotiable order of withdrawals, savings deposits and time deposits. Its loan products include credit card loans; auto and retail banking loans; and commercial and multifamily real estate, and commercial and industrial loans.
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The company also offers credit and debit card products, online direct banking services and treasury management and depository services. It serves consumers, small businesses and commercial clients through digital channels, branches, cafés and other distribution channels located in New York, Louisiana, Texas, Maryland, Virginia, New Jersey and California.

Capital One Financial stock comes with a 2.39% dividend. The $130 Citigroup target price compares with a consensus target of $116.18 and Thursday’s close at $98.93.

Citigroup

This top bank stock has rallied nicely off the lows, and Buffett bought $2.5 billion worth of stock back in the summer of 2022. Citigroup Inc. (NYSE: C) is a leading global diversified financial service company that provides consumers, corporations and governments a broad range of financial products and services.

The company offers services such as consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. And it operates and does business in more than 160 countries and jurisdictions in North America, Latin America, Asia and elsewhere.

Trading at a still cheap 7.0 times estimated 2023 earnings, Citigroup stock looks quite reasonable in what remains a volatile stock market and in a sector that has dramatically lagged.

Investors receive a 4.87% dividend. Citigroup stock has an $85 price target at Oppenheimer, which is a Wall Street high. The consensus target is $50.61, and shares closed at $41.71 on Thursday.

Mastercard

This continues to be one of the top credit card players in the world. Mastercard Inc. (NYSE: MA) is a technology company that provides transaction processing and other payment-related products and services globally. It facilitates the processing of payment transactions, including authorization, clearing and settlement, as well as delivers other payment-related products and services.

The company offers integrated products and value-added services for account holders, merchants, financial institutions, businesses, governments and other organizations, such as programs that enable issuers to provide consumers with credits to defer payments. Its payment products and solutions allow its customers to access funds in deposit and other accounts, and it offers prepaid programs services, as well as commercial credit, debit and prepaid payment products and solutions.
Mastercard also provides such value-added products and services as cyber and intelligence solutions for parties to transact, as well as proprietary insights, drawing on principled use of consumer, and merchant data services. In addition, the company offers analytics, test and learn, consulting, managed services, loyalty, processing and payment gateway solutions for e-commerce merchants.
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Further, it provides open banking and digital identity platforms services. The company offers payment solutions and services under Mastercard, Maestro and Cirrus banners.

The dividend yield is just 0.56%. J.P. Morgan $510 price target is well above the consensus target of $426.33. On Thursday, Mastercard stock closed at $403.36.

Visa

This top credit card issuer is becoming a huge leader in digital pay. Visa Inc. (NYSE: V) operates as a payments technology company worldwide. Its products and services include the following:

• VisaNet, a transaction processing network that enables authorization, clearing and settlement of payment transactions
• Credit, debit and prepaid card products
• Tap to pay, tokenization and click to pay
• Visa Direct, a real-time payments network
• Visa B2B Connect, a multilateral B2B cross-border payments network
• Visa Treasury as a Service, a cross-border consumer payments business
• Visa DPS, providing a range of value-added services, including fraud mitigation, dispute management, data analytics, campaign management, a suite of digital solutions and contact center services
• Cybersource, a payment management platform
• Risk and identity solutions, such as Visa Advanced Authorization, Visa Secure, Visa Advanced Identity Score and Visa Consumer Authentication Service
• Visa Consulting and Analytics, a payments consulting advisory service

The company provides its services under the Visa, Visa Electron, Interlink, VPAY and PLUS brands.

Shareholders receive a 0.74% dividend. The J.P. Morgan target price is $296. The consensus target is $278.66. Visa stock closed at $236.61 on Thursday.

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These seven top stocks, many of which have underperformed during the massive AI tech rally, are owned by Warren Buffett’s Berkshire Hathaway and should do very well as rates continue higher and may remain at 16-year highs well into 2024.

Given the ongoing inversion between the two-year note and the benchmark 10-year government paper, it is a good bet that a recession is headed our way in the first half of 2024. So it makes sense to own stocks that will benefit from the continued surge higher in rates and offer quite cheap valuations.

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