Financial providers use their expertise in capital allocation and risk assessment to help facilitate economic growth while offering consumers and businesses essential financial services. These companies have benefited from increased market activity and economic fundamentals, so it's no surprise the industry has posted a 19.6% gain over the past six months, beating the S&P 500 by 4.2 percentage points.

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. On that note, here are two financials stocks we think can generate sustainable market-beating returns and one that may face trouble.

One Financials Stock to Sell:

Compass Diversified (CODI)

Market Cap: $547.7 million

Operating with a permanent capital structure unlike traditional private equity funds, Compass Diversified (NYSE: CODI) is a private equity firm that acquires, manages, and grows middle-market businesses across various industries.

Why Do We Think Twice About CODI?

1. Muted 1.6% annual revenue growth over the last two years shows its demand lagged behind its financials peers
2. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 9.2% annually
3. ROE of 1% reflects management’s challenges in identifying attractive investment opportunities

Compass Diversified is trading at $7.28 per share, or 3.1x forward P/E. Dive into our free research report to see why there are better opportunities than CODI.

Two Financials Stocks to Watch:

SoFi (SOFI)

Market Cap: $30.65 billion

Starting as a student loan refinancing company founded by Stanford business school students in 2011, SoFi Technologies (NASDAQ: SOFI) operates a digital financial platform offering lending, banking, investing, and other financial services to help members borrow, save, spend, invest, and protect their money.

Why Is SOFI a Top Pick?

1. Annual revenue growth of 28.5% over the last two years was superb and indicates its market share increased during this cycle
2. Performance over the past two years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 75.9% outpaced its revenue gains

SoFi’s stock price of $25.41 implies a valuation ratio of 69x forward P/E. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.

PayPal (PYPL)

Market Cap: $65.21 billion

Originally spun off from eBay in 2015 after being acquired by the auction giant in 2002, PayPal (NASDAQ: PYPL) operates a global digital payments platform that enables consumers and merchants to send, receive, and process payments online and in person.

Why Could PYPL Be a Winner?

1. 10.9% annual revenue growth over the last five years was better than the sector average, highlighting the value of its products and services
2. Share repurchases over the last two years enabled its annual earnings per share growth of 12.6% to outpace its revenue gains
3. Stellar return on equity showcases management’s ability to surface highly profitable business ventures

At $68.26 per share, PayPal trades at 13x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.

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