Financial institutions play a critical role, offering everything from consumer banking to wealth management and specialized financial solutions. These companies have benefited from improving market activity and economic fundamentals, so it's no surprise the industry has posted a 11.4% gain over the past six months, nearly mirroring the S&P 500.
Nevertheless, investors should tread carefully as many firms are cyclical due to their leverage and exposure to regulatory changes. On that note, here are three financials stocks we’re steering clear of.
Donnelley Financial Solutions (DFIN)
Market Cap: $1.56 billion
Born from the need to navigate increasingly complex financial regulations in the digital age, Donnelley Financial Solutions (NYSE: DFIN) provides software and technology-enabled services that help companies comply with SEC regulations and manage financial transactions and reporting requirements.
Why Does DFIN Fall Short?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.5% annually over the last five years
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 4.3% annually
Donnelley Financial Solutions is trading at $56.77 per share, or 2x forward price-to-sales. Read our free research report to see why you should think twice about including DFIN in your portfolio.
LendingClub (LC)
Market Cap: $1.97 billion
Pioneering peer-to-peer lending in the US before evolving into a digital bank, LendingClub (NYSE: LC) operates a marketplace that connects borrowers with lenders, offering personal loans, auto refinancing, and banking services.
Why Are We Cautious About LC?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 8% 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
- Underwhelming 6.7% return on equity reflects management’s difficulties in finding profitable growth opportunities
LendingClub’s stock price of $17.15 implies a valuation ratio of 18.5x forward P/E. To fully understand why you should be careful with LC, check out our full research report (it’s free).
StoneX (SNEX)
Market Cap: $5.33 billion
Originally known as INTL FCStone until its 2020 rebranding, StoneX Group (NASDAQ: SNEX) provides a global financial services network connecting companies, traders, and investors to markets through clearing, execution, and advisory services.
Why Does SNEX Give Us Pause?
- Earnings growth over the last four years fell short of the peer group average as its EPS only increased by 3.2% annually
- Debt-to-equity ratio of 7.2× is concerningly high, indicating excessive leverage that could limit financial flexibility
At $101.89 per share, StoneX trades at 2.4x forward P/E. Dive into our free research report to see why there are better opportunities than SNEX.
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