State Street has had an impressive run over the past six months as its shares have beaten the S&P 500 by 9.3%. The stock now trades at $111.70, marking a 26.8% gain. This performance may have investors wondering how to approach the situation.

Is there a buying opportunity in State Street, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think State Street Will Underperform?

We’re happy investors have made money, but we're swiping left on State Street for now. Here are three reasons we avoid STT and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years.

Unfortunately, State Street’s 2.3% annualized revenue growth over the last five years was sluggish. This fell short of our benchmarks.

2. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

State Street’s EPS grew at an unimpressive 5.2% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 2.3% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

3. Previous Growth Initiatives Haven’t Impressed

Return on equity (ROE) measures how effectively banks generate profit from each dollar of shareholder equity - a critical funding source. High-ROE institutions typically compound shareholder wealth faster over time through retained earnings, share repurchases, and dividend payments.

Over the last five years, State Street has averaged an ROE of 9.8%, uninspiring for a company operating in a sector where the average shakes out around 10%.

Final Judgment

We see the value of companies driving economic growth, but in the case of State Street, we’re out. With its shares outperforming the market lately, the stock trades at 10.6× forward P/E (or $111.70 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d suggest looking at the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of State Street

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