The S&P 500 officially hit a new all-time high last week, confirming a new bull market. Inflation continues to subside, and many expect interest rate cuts this year, which could fuel a further surge in stocks.
As a long-term investor, your focus should be on consistently putting your cash to work in quality companies with robust competitive advantages that are growing well. It's also important to diversify across industries to gain exposure to different aspects of the economy.
Two growth stocks in the financial sector that can make solid additions to your portfolio are Kinsale Capital (KNSL -17.31%) and Tradeweb Markets (TW -0.30%). Here's why.
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1. Kinsale Capital
Companies and individuals are happy to pay for insurance to protect them from downside risks. Excess and surplus (E&S) insurance is one tool companies use to manage unique risks when regular insurance is insufficient.
Kinsale Capital specializes in this specialty insurance, writing policies that cover small business casualty, construction, professional liability, and aviation, to name a few. What makes Kinsale special is its ability to tap into its deep knowledge base to cover risks and generate stellar profits on the policies it underwrites.
Its management team has decades of experience in the industry, and its platform leverages its data and knowledge to analyze trends and price policies accordingly. This platform and data advantage give Kinsale a strong competitive moat that has generated excellent earnings and stock price appreciation.
You can evaluate Kinsale's underwriting ability through its combined ratio. When analyzing insurance companies, the combined ratio is a great way to see how good a company is at writing profitable insurance policies. This ratio divides the claims costs plus expenses by the premiums taken in. A ratio of 100 means a company's policies are breaking even, and the lower the ratio, the more profitable the policies are.
Over the past seven years, Kinsale's combined ratio has averaged 81%, crushing its competitors and driving its excellent stock performance. Its stellar underwriting is why the stock has smashed the market since its public debut in 2016, delivering investors a total return of 2,180%.
Chart by author.
With risks relating to climate, cybersecurity, and evolving business models rising, E&S insurers could continue to see strong demand. According to Straits Research, the specialty insurance market could reach $179 billion by 2030, representing a 9.3% compound annual growth rate.
Considering Kinsale's track record of writing profitable policies and its ongoing growth in the specialty insurance market, this under-the-radar finance stock can make an excellent addition to your portfolio.
2. Tradeweb Markets
Tradeweb Markets provides Wall Street professionals, such as hedge funds, central banks, and market makers, with a trading platform to buy and sell various financial assets. Founded in 1996, Tradeweb brought U.S. Treasuries trading into the technological age.
What makes Tradeweb an intriguing investment is its growing market share, which it has achieved by providing its professional clients with the best trading experience possible. Over recent years, the company has made key acquisitions to build its already expansive platform, benefiting its clients through lower trading costs while delicately protecting their information so they don't get front-run on their orders.
The proof is in the pudding, which you can see from Tradeweb's growing market share. Since 2016, Tradeweb's average daily volume across all its available tradable assets has increased by 21% compounded annually. For comparison, the total daily volume across those markets grew at 11% annually -- showing Tradeweb's growth is nearly double that of the market it serves.
Its fastest-growing markets include interest rate products (think U.S. Treasuries or mortgage-backed securities) and credit products (high-yield bonds in the U.S. and Europe and municipal bonds). Another favorable tailwind for Tradeweb is partnerships with major financial companies, including BlackRock, Freddie Mac, Cboe Global Markets, and S&P Global.
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Best of all, there's still room for further growth. Roughly 60% of U.S. Treasury trading is digitized, leaving about 40% of trades that still occur over the phone. Not only that, but the platform continues to grab an increasing share of U.S. investment-grade debt and is also making headway in the global exchange-traded fund (ETF) market.
Tradeweb has benefited from active markets over the past few years and should continue to enjoy tailwinds from increased trading activity. Analysts expect Tradeweb's solid growth to persist, with earnings per share growing 16% in 2024 and maintaining double-digit growth through 2027.
Tradeweb has done an excellent job providing a top-notch experience for clients, evidenced by its growing market share, making it another excellent financial stock to add to your diversified portfolio today.
