Financial providers use their expertise in capital allocation and risk assessment to help facilitate economic growth while offering consumers and businesses essential financial services. Still, investors are uneasy as companies face challenges from an unpredictable interest rate and inflation environment. These doubts have caused the industry to lag recently as financials stocks have collectively shed 12.8% over the past six months. This drawdown was particularly discouraging since the S&P 500 held its ground.
Investors should tread carefully as many of these firms are also cyclical, and any misstep can have you catching a falling knife. Taking that into account, here are three financials stocks we’re steering clear of.
Franklin Resources (BEN)
Market Cap: $12.57 billion
Operating under the widely recognized Franklin Templeton brand since 1947, Franklin Resources (NYSE: BEN) is a global investment management organization that offers financial services and solutions to individuals, institutions, and wealth advisors worldwide.
Why Should You Dump BEN?
- Muted 4.5% annual revenue growth over the last two years shows its demand lagged behind its financials peers
- Earnings per share fell by 2.5% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- ROE of 8.3% reflects management’s challenges in identifying attractive investment opportunities
Franklin Resources is trading at $24.14 per share, or 9x forward P/E. If you’re considering BEN for your portfolio, see our FREE research report to learn more.
Credit Acceptance (CACC)
Market Cap: $4.81 billion
Founded in 1972 by Donald Foss to serve customers overlooked by traditional lenders, Credit Acceptance (NASDAQ: CACC) provides auto financing solutions that enable car dealers to sell vehicles to consumers with limited or impaired credit histories.
Why Do We Steer Clear of CACC?
- Muted 2.8% annual revenue growth over the last five years shows its demand lagged behind its financials peers
- Earnings per share fell by 2% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Debt-to-equity ratio of 4.1× shows the firm has taken on excessive debt, leaving little room for error
At $448.62 per share, Credit Acceptance trades at 10.4x forward P/E. Dive into our free research report to see why there are better opportunities than CACC.
Jefferies (JEF)
Market Cap: $7.51 billion
Tracing its roots back to 1962 and rebranded from Leucadia National Corporation in 2018, Jefferies Financial Group (NYSE: JEF) is a global investment banking and capital markets firm that provides advisory services, securities trading, and asset management to corporations, institutions, and wealthy individuals.
Why Does JEF Worry Us?
- Sales trends were unexciting over the last five years as its 4.1% annual growth was below the typical financials company
- Performance over the past five years shows its incremental sales were less profitable, as its 1.8% annual earnings per share growth trailed its revenue gains
- 34× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Jefferies’s stock price of $36.51 implies a valuation ratio of 9.3x forward P/E. Check out our free in-depth research report to learn more about why JEF doesn’t pass our bar.
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