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 9.5% gain over the past six months, nearly mirroring the S&P 500.
Although these firms have produced good results, only a handful will thrive over the long term as fintech disruptors are rapidly taking market share from the incumbents. Taking that into account, here is one resilient financials stock at the top of our wish list and two that may face trouble.
Two Financials Stocks to Sell:
Credit Acceptance (CACC)
Market Cap: $5.73 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 Should You Sell CACC?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Performance over the past two years shows each sale was less profitable, as its earnings per share fell by 10% annually
- High debt-to-equity ratio of 3.9× shows the firm carries too much debt relative to shareholder equity, increasing bankruptcy risk
At $510.01 per share, Credit Acceptance trades at 11.8x forward P/E. Dive into our free research report to see why there are better opportunities than CACC.
Ally Financial (ALLY)
Market Cap: $12.64 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 Do We Think ALLY Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 3.8% annually over the last two years
- Sales were less profitable over the last two years as its earnings per share fell by 8.9% annually, worse than its revenue declines
- Capital trends were unexciting over the last five years as its 1.7% annual tangible book value per share growth was below the typical financials firm
Ally Financial is trading at $40.82 per share, or 9x forward P/E. Read our free research report to see why you should think twice about including ALLY in your portfolio.
One Financials Stock to Buy:
Tradeweb Markets (TW)
Market Cap: $26.47 billion
Founded in 1996 as one of the pioneers in electronic bond trading, Tradeweb Markets (NASDAQ: TW) builds and operates electronic marketplaces that connect financial institutions for trading across rates, credit, equities, and money markets.
Why Should You Buy TW?
- Annual revenue growth of 25.9% over the last two years was superb and indicates its market share increased during this cycle
- Performance over the past two years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 27.5% outpaced its revenue gains
Tradeweb Markets’s stock price of $124.01 implies a valuation ratio of 34.3x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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