Financial firms serve as the backbone of the economy, providing essential services from lending and investment management to risk management and payment processing. But worries about economic uncertainty and potential market volatility have kept sentiment in check, and over the past six months, the industry's 13.2% return has trailed the S&P 500 by 8 percentage points.

While some firms have strong balance sheets and diversified revenue streams that enable them to thrive in any environment, the odds aren't great for the ones we're analyzing today. With that said, here are three financials stocks we’re steering clear of.

State Street (STT)

Market Cap: $32.65 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 Does STT Give Us Pause?

1. Sizable revenue base leads to growth challenges as its 3% annual revenue increases over the last five years fell short of other financials companies
2. Earnings growth underperformed the sector average over the last five years as its EPS grew by just 7.3% annually

State Street’s stock price of $116.88 implies a valuation ratio of 10.5x forward P/E. Read our free research report to see why you should think twice about including STT in your portfolio.

Cohen & Steers (CNS)

Market Cap: $3.49 billion

Founded in 1986 as a pioneer in real estate investment trusts (REITs), Cohen & Steers (NYSE: CNS) is an investment manager specializing in real estate securities, infrastructure, real assets, and preferred securities for institutional and individual investors.

Why Are We Hesitant About CNS?

1. Muted 5.5% annual revenue growth over the last two years shows its demand lagged behind its financials peers
2. Incremental sales over the last two years were less profitable as its 2% annual earnings per share growth lagged its revenue gains

Cohen & Steers is trading at $70.49 per share, or 20.3x forward P/E. Dive into our free research report to see why there are better opportunities than CNS.

Capital Southwest (CSWC)

Market Cap: $1.14 billion

Originally founded in 1961 as a venture capital investor that helped launch Texas Instruments, Capital Southwest (NASDAQ: CSWC) is a business development company that provides debt and equity financing to middle-market companies primarily in the United States.

Why Do We Think Twice About CSWC?

1. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 5.5% annually

At $20.58 per share, Capital Southwest trades at 9x forward P/E. To fully understand why you should be careful with CSWC, check out our full research report (it’s free for active Edge members).

Stocks We Like More

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