Financial providers use their expertise in capital allocation and risk assessment to help facilitate economic growth while offering consumers and businesses essential financial services. Furthermore, supportive sentiment has created ideal market conditions, a trend that has enabled the industry to return 16% over the past six months. At the same time, the S&P 500 was up 10.9%.
Regardless of these results, investors must exercise caution as many firms are sensitive to economic cycles and regulatory changes. Taking that into account, here are three financials stocks we’re passing on.
Artisan Partners (APAM)
Market Cap: $3 billion
Founded in 1994 with a focus on autonomous investment teams and a "high-value-added" approach, Artisan Partners (NYSE:APAM) is an investment management firm that offers actively managed equity and fixed income strategies to institutional and individual investors.
Why Do We Think APAM Will Underperform?
- 2.8% annual revenue growth over the last five years was slower than its financials peers
- Earnings per share fell by 1.3% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
Artisan Partners’s stock price of $42.25 implies a valuation ratio of 11.1x forward P/E. Read our free research report to see why you should think twice about including APAM in your portfolio.
Capital One (COF)
Market Cap: $133.7 billion
Starting as a credit card company in 1988 before expanding into a full-service bank, Capital One (NYSE:COF) is a financial services company that offers credit cards, auto loans, banking services, and commercial lending to consumers and businesses.
Why Are We Cautious About COF?
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 4.4% annually
- Annual tangible book value per share declines of 1.6% for the past five years show its capital management struggled during this cycle
- Underwhelming 9.2% return on equity reflects management’s difficulties in finding profitable growth opportunities
Capital One is trading at $218.28 per share, or 9.7x forward P/E. Dive into our free research report to see why there are better opportunities than COF.
Bread Financial (BFH)
Market Cap: $4.07 billion
Formerly known as Alliance Data Systems until its 2022 rebranding, Bread Financial (NYSE:BFH) provides credit cards, installment loans, and savings products to consumers while powering branded payment solutions for retailers and merchants.
Why Are We Wary of BFH?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Earnings per share fell by 6.2% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
At $105.93 per share, Bread Financial trades at 8.3x forward P/E. If you’re considering BFH for your portfolio, see our FREE research report to learn more.
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