Financial firms serve as the backbone of the economy, providing essential services from lending and investment management to risk management and payment processing. Still, investors are uneasy as companies face challenges from an unpredictable interest rate and inflation environment. These doubts have certainly contributed to the indutry's recent underperformance - over the past six months, its 20.7% gain has fallen behind the S&P 500's 24.7% rise.
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 that may face trouble.
NerdWallet (NRDS)
Market Cap: $864.1 million
Born from founder Tim Chen's frustration with the lack of transparent credit card information when helping his sister in 2009, NerdWallet (NASDAQ: NRDS) is a digital platform that provides financial guidance to help consumers and small businesses make smarter decisions about credit cards, loans, insurance, and other financial products.
Why Does NRDS Fall Short?
- Push for growth has led to negative returns on capital, signaling value destruction
NerdWallet is trading at $11.59 per share, or 2x forward P/E. To fully understand why you should be careful with NRDS, check out our full research report (it’s free for active Edge members).
FirstCash (FCFS)
Market Cap: $6.86 billion
Offering a financial lifeline to the unbanked and credit-constrained since 1988, FirstCash (NASDAQ: FCFS) operates pawn stores across the U.S. and Latin America while also providing retail point-of-sale payment solutions for credit-constrained consumers.
Why Are We Wary of FCFS?
- Annual revenue growth of 7.4% over the last two years was below our standards for the financials sector
- Products and services are facing significant credit quality challenges during this cycle as tangible book value per share has declined by 14.1% annually over the last five years
At $154.73 per share, FirstCash trades at 17.8x forward P/E. Read our free research report to see why you should think twice about including FCFS in your portfolio.
New Mountain Finance (NMFC)
Market Cap: $1.00 billion
Operating as a financial bridge for growing businesses that might be overlooked by traditional banks, New Mountain Finance (NASDAQ: NMFC) is a business development company that provides loans and debt financing to middle-market companies in defensive growth industries.
Why Do We Think Twice About NMFC?
- 2.3% annual revenue growth over the last two years was slower than its financials peers
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 11% annually
New Mountain Finance’s stock price of $9.56 implies a valuation ratio of 3.1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than NMFC.
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