Financial firms serve as the backbone of the economy, providing essential services from lending and investment management to risk management and payment processing. But uncertainty about fiscal and monetary policy has tempered enthusiasm, limiting the industry's gains to 15.1% over the past six months. This return lagged the S&P 500's 23.8% climb.
Investors should tread carefully as many of these firms are also cyclical, and any misstep can have you catching a falling knife. On that note, here are three financials stocks we’re passing on.
Ally Financial (ALLY)
Market Cap: $12.3 billion
Born from the former GMAC (General Motors Acceptance Corporation) and rebranded in 2010, Ally Financial (NYSE:ALLY) operates a digital-first bank offering auto financing, insurance, mortgage lending, and investment services to consumers and commercial clients.
Why Should You Dump ALLY?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 3.2% annually over the last two years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Tier one capital ratio of 9.7% is insufficient to meet regulatory requirements, increasing the probability of government intervention
At $39.80 per share, Ally Financial trades at 8.2x forward P/E. Read our free research report to see why you should think twice about including ALLY in your portfolio.
Fiserv (FI)
Market Cap: $38.38 billion
Powering over 1 billion accounts and processing more than 12,000 financial transactions per second globally, Fiserv (NYSE:FI) provides payment processing and financial technology solutions that enable merchants, banks, and credit unions to accept payments and manage financial transactions.
Why Are We Cautious About FI?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6.1% over the last two years was below our standards for the financials sector
- ROE of 8.8% reflects management’s challenges in identifying attractive investment opportunities
Fiserv is trading at $72.38 per share, or 6.2x forward P/E. If you’re considering FI for your portfolio, see our FREE research report to learn more.
Prospect Capital (PSEC)
Market Cap: $1.24 billion
Operating as one of the largest publicly traded business development companies in the United States, Prospect Capital (NASDAQ:PSEC) provides debt and equity financing to middle-market companies across various industries.
Why Do We Pass on PSEC?
- Sales tumbled by 8.1% annually over the last two years, showing market trends are working against its favor during this cycle
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 66.3% annually while its revenue grew
- Products and services are facing significant credit quality challenges during this cycle as tangible book value per share has declined by 4.3% annually over the last five years
Prospect Capital’s stock price of $2.68 implies a valuation ratio of 1.7x trailing 12-month price-to-sales. To fully understand why you should be careful with PSEC, check out our full research report (it’s free for active Edge members).
Stocks We Like More
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