Financial institutions play a critical role, offering everything from consumer banking to wealth management and specialized financial solutions. Still, investors are uneasy as companies face challenges from an unpredictable interest rate and inflation environment. These doubts have caused the industry to lag recently as financials stocks have collectively shed 2.7% over the past six months. This performance is a noticeable divergence from the S&P 500’s 10% return.
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. Keeping that in mind, here are three financials stocks we’re passing on.
BNY (BNY)
Market Cap: $98.85 billion
Tracing its roots back to 1784 when it was founded by Alexander Hamilton, BNY (NYSE: BNY) is a global financial institution that provides asset servicing, wealth management, and investment services to institutions, corporations, and high-net-worth individuals.
Why Do We Think Twice About BNY?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 5.7% over the last five years was below our standards for the financials sector
- Large asset base makes it harder to grow tangible book value per share quickly, and its annual tangible book value per share growth of 4% over the last five years was below our standards for the financials sector
- Underwhelming 9.6% return on equity reflects management’s difficulties in finding profitable growth opportunities
BNY is trading at $144.33 per share, or 16x forward P/E. To fully understand why you should be careful with BNY, check out our full research report (it’s free).
T. Rowe Price (TROW)
Market Cap: $22.92 billion
Founded in 1937 by Thomas Rowe Price Jr., who pioneered the growth stock investing approach, T. Rowe Price (NASDAQ: TROW) is an investment management firm that offers mutual funds, advisory services, and retirement planning solutions to individuals and institutions.
Why Does TROW Worry Us?
- 2.6% annual revenue growth over the last five years was slower than its financials peers
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 1.4% annually
T. Rowe Price’s stock price of $107.04 implies a valuation ratio of 11x forward P/E. If you’re considering TROW for your portfolio, see our FREE research report to learn more.
State Street (STT)
Market Cap: $45.04 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 Are We Wary of STT?
- 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 4.6% for the last five years
At $162.76 per share, State Street trades at 12.6x forward P/E. Check out our free in-depth research report to learn more about why STT doesn’t pass our bar.
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