Despite some significant volatility across the stretch and big macroeconomic risk factors, the financial sector has done quite well over the last year of trading. As of this writing, the the S&P 500 Financials Sector index has delivered a total return of 25% across the stretch -- crushing the S&P 500 index's already-impressive gain of 20% over the period.
While financial stocks have generally outperformed over the last 12 months, there are still some promising players in the sector that trade at big discounts compared to their peak valuations. If you're on the hunt for portfolio additions that can deliver strong returns, read on to see why two Motley Fool contributors identified these stocks as top plays right now.
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Upstart stock: down 83%
Keith Noonan (Upstart): On the heels of its recent post-earnings sell-off, Upstart (UPST -1.01%) is looking like a smart buy right now. The disruptive lender actually posted very strong results in the quarter and continues to make smart moves to shore up its long-term future, but the stock saw a big pullback following its recent business update.
In the second quarter, Upstart posted earnings per share of $0.05 on sales of $257 million. The performance crushed the average Wall Street analyst estimate, which had called for a per-share loss of $0.10 on sales of $225.4 million. Revenue was up roughly 101% compared to last year's second quarter, and loans originated in the quarter were up 159% year over year to 372,599. Despite some strong momentum recently, the stock is down roughly 83% from its all-time high.
Upstart's artificial intelligence (AI) lending platform showed very strong momentum in the second quarter, and the company's investments helped power an overall profit despite a loss from operations of $4.5 million in the quarter. Even though the business posted an operating loss, the performance represented a big improvement from the $55.5 million loss from operations recorded in last year's quarter. Overall, the company notched its first quarter of profitability in years -- and there are signs of encouraging momentum despite macroeconomic uncertainty on the horizon.
Despite the strong Q2 results, Upstart saw big sell-offs following the quarterly report due to comments from management suggesting that inflation remains a major risk factor and that competitive intensity in its core service markets is increasing. On the other hand, guidance for sales to increase roughly 66% annually this year still suggests fairly strong momentum, even if hitting that range would represent a significant deceleration from the growth seen in Q2.
Overall, the near-term macroeconomic picture looks like a mixed bag for Upstart. While the labor market appears to be weakening, it now looks very likely that the Federal Reserve will deliver a substantial rate cut at its September meeting. The company's stock could continue to see significant volatility in conjunction with macroeconomic trends, but the business results are strong enough to support a long-term investment in the fintech player right now.
Nu stock: down 23%
Jennifer Saibil (Nu): Nu Holdings (NU -0.93%) is a digital bank based out of Brazil, but it caught the attention of Warren Buffett and Berkshire Hathaway (BRK.A -0.40%) (BRK.B 0.83%) several years ago. It sold out of the young bank stock in the 2025 first quarter, but growth investors shouldn't let that sway them from taking a position in this high-growth stock. It didn't quite fit the standard Buffett stock mold from the beginning, but it could be a growth investor's dream stock. It's fast-growing, it's profitable, and it has tons of long-term potential.
About 60% of the adult population in Brazil is already on Nu's platform, but that could be misleading in terms of its future opportunity. Roughly 85% of this cohort is active, and 60% of it uses Nu as its main bank, so more than 30% of the market in Brazil is using Nu as its bank. However, it only has about 5% of the market share of gross profit, which means there's still a wide-open opportunity to monetize this market more effectively with cross-selling and upselling. Nu is also upgrading its credit models with artificial intelligence (AI) to provide more access to credit, opening up another opportunity.
That's just in Brazil, where most of its business is concentrated today. It's still a tiny presence in Mexico, where it counts 11 million customers, and Colombia, where it just surpassed 3 million. In Mexico, customer count increased 70% over the past year, deposits more than doubled to $5 billion, and revenue almost doubled to $245 million. It was just approved for a banking charter in Mexico, which will allow it to offer even more services and capitalize on its opportunities.
It's also extremely profitable, since its all-digital model lends itself to cost efficiency. Its cost to serve has remained mostly unchanged below $1, while its average revenue per active customer continues to climb. It's usually around $5 for new customers, but it has reached $25 for longtime customers. The average for incumbent banks, which have been around for decades, is $40 per customer, giving Nu even higher aspirations.
Nu stock has been impacted by economic volatility in Brazil as well as the Buffett sale, and it's 23% off of its high. But as it continues to report high growth, expect the stock to soar over time.
