Financial firms serve as the backbone of the economy, providing essential services from lending and investment management to risk management and payment processing. Furthermore, supportive sentiment has created ideal market conditions, a trend that has enabled the industry to return 11.4% over the past six months, almost identical to 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. With that said, here are three financials stocks we’re swiping left on.
BNY Mellon (BK)
Market Cap: $74.47 billion
Tracing its roots back to 1784 when it was founded by Alexander Hamilton, BNY Mellon (NYSE: BK) is a global financial institution that provides asset servicing, wealth management, and investment services to institutions, corporations, and high-net-worth individuals.
Why Are We Wary of BK?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 2.9% for the last five years
- Large asset base makes it harder to grow tangible book value per share quickly, and its annual tangible book value per share growth of 3.6% over the last five years was below our standards for the financials sector
- Low return on equity reflects management’s struggle to allocate funds effectively
BNY Mellon is trading at $106.20 per share, or 14.5x forward P/E. Read our free research report to see why you should think twice about including BK in your portfolio.
State Street (STT)
Market Cap: $32.62 billion
Dating back to 1792 when Boston's Long Wharf was the center of global shipping and trade, State Street (NYSE: STT) provides custody, investment management, and other financial services to institutional investors like pension funds, asset managers, and central banks worldwide.
Why Do We Think STT Will Underperform?
- Annual sales growth of 2.3% over the last five years lagged behind its financials peers as its large revenue base made it difficult to generate incremental demand
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 5.2% annually
- ROE of 9.8% reflects management’s challenges in identifying attractive investment opportunities
State Street’s stock price of $114.97 implies a valuation ratio of 10.9x forward P/E. To fully understand why you should be careful with STT, check out our full research report (it’s free).
HA Sustainable Infrastructure Capital (HASI)
Market Cap: $3.50 billion
With a proprietary "CarbonCount" metric that quantifies the environmental impact of each dollar invested, HA Sustainable Infrastructure Capital (NYSE: HASI) is an investment firm that finances and develops climate-positive infrastructure projects across renewable energy, energy efficiency, and ecological restoration.
Why Are We Cautious About HASI?
- Incremental sales over the last five years were less profitable as its 8% annual earnings per share growth lagged its revenue gains
- Low return on equity reflects management’s struggle to allocate funds effectively
- Negative EBITDA restricts its access to capital and increases the probability of shareholder dilution if things turn unexpectedly
At $28.24 per share, HA Sustainable Infrastructure Capital trades at 10x forward P/E. Dive into our free research report to see why there are better opportunities than HASI.
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