SOURCE: BLOOMBERG
10,000
20,000
30,000
40,000
50,000
$60,000
GROWTH OF $10,000 INVESTED IN THE
S&P 500 INDEX ON MARCH 9, 2009
(LAST MARKET BOTTOM)
GROWTH INCLUDING DIVIDENDS
$55,773
$44,677
OCT. 25, 2019
MARCH 9, 2009 2013 2015 2017 2019
136
FORTUNE.COM // DECEMBER 2019
FINANCIAL STOCKS
In a sector facing mighty headwinds,
Main Street looks stronger than Wall Street.T
OILING AS THEY DO in a heav-
ily regulated, slower-growing
industry, financial stocks usu-
ally trade at a discount to the
broader market. These days,
that gap looks like a yawning gulf. Financial
stocks on the S&P 500 were trading at 12.8
times estimated 2020 earnings at the start of
November, compared with an average of 18
for the index as a whole.
Such underwhelming metrics make sense
in many respects. Indeed, analysts expect the
sector’s earnings to decline next year. The Fed’s
pivot back to low-rate mode hinders banks’
ability to earn net interest income—the differ-
ence between what they pay for deposits and
what they earn through lending. Investment-
banking-focused firms like Goldman Sachs and
Morgan Stanley have taken hits to their bottom
lines, as tech-driven innovations have eroded
their profit margins in capital markets and
trading. (See our feature about Goldman Sachsity Growth, says turmoil over data privacy
shouldn’t chase investors away from Alpha-
bet, whose regulatory issues, he says, “aren’t
nearly as complicated as Facebook’s.” Ben-
kendorf believes the company has been ahead
of the field in adapting its business model
to give consumers more control over their
data, an evolution that should help Alphabet
protect its incredibly profitable ad business
from regulators. Other investors are excited
about Alphabet’s portfolio of R&D-driven
businesses. Gary Robinson, the joint manager
of Baillie Gifford’s U.S. Equity Growth Fund,
sees autonomous driving as one of “the most
impactful” trends in tech; he thinks Alpha-
bet’s exposure to that business through the
Waymo self-driving car project is an increas-
ingly compelling reason to own the stock.
With its stock up more than 40% this year,
nobody would call Microsoft a hidden gem.
(Its leadership tops Fortune’s Businessperson
of the Year list, in this issue.) But analysts still
see enormous upside in Microsoft’s Azure
cloud platform. James Tierney, CIO of concen-
trated U.S. growth at AllianceBernstein, be-
lieves Azure could grow 40% annually over the
next five years. And with returns on Treasury
bills expected to stay low, some sharehold-
ers, including Randy Watts, chief investment
strategist at William O’Neil, an equity research
firm, like Microsoft for its dividend, currently
1.4%. “A big liquid stock like that—that can
grow its earnings and grow its dividend—we
think is very competitive,” says Watts.
Bold Bet
YES, ELON MUSK GENERATES an enormous amount
of dismaying headline noise. But for investors
who can look past it, Catherine Wood, CEO
of ARK Invest, a tech-focused investment
manager, is betting on “completely misunder-
stood” Tesla, the darling of short sellers the
world over. Wood believes Tesla’s low battery
costs, self-designed A.I. chips, and the data
it has collected from 10 billion to 12 billion
miles of real-world driving by its customers
put the company at a competitive advantage
in electric vehicles—which Wood predicts will
account for 30% of new car sales by 2023.
PICKS
Synopsys
(SNPS, $136)ASML
(ASML , $267)Cisco
(CSCO, $49)Alphabet
(GOOGL , $1,309)Microsoft
(MSFT, $146)Tesla
(TSLA, $337)PRICES AS OF 11/08/19An Unyielding Advantage
Dividends have accounted for about 20% of total stock returns
in this bull market. They matter even more when markets stall.