3 Financials Stocks with Questionable Fundamentals
Financial providers use their expertise in capital allocation and risk assessment to help facilitate economic growth while offering consumers and businesses essential financial services. Still, investors are uneasy as companies face challenges from an unpredictable interest rate and inflation environment. These doubts have certainly contributed to the indutry's recent underperformance - over the past six months, its 10.8% gain has fallen behind the S&P 500's 13.9% rise.
A cautious approach is imperative when dabbling in financials as many are sensitive to economic cycles and regulatory changes. Taking that into account, here are three financials stocks we’re passing on.
T. Rowe Price (TROW)
Market Cap: $22.91 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 Are We Cautious About TROW?
- Sales trends were unexciting over the last five years as its 4.2% annual growth was below the typical financials company
- Performance over the past five years shows its incremental sales were less profitable, as its 1.5% annual earnings per share growth trailed its revenue gains
T. Rowe Price’s stock price of $104.64 implies a valuation ratio of 10.1x forward P/E. Check out our free in-depth research report to learn more about why TROW doesn’t pass our bar.
FactSet (FDS)
Market Cap: $10.91 billion
Founded in 1978 when financial data was still primarily delivered through paper reports, FactSet (NYSE:FDS) provides financial data, analytics, and technology solutions that investment professionals use to research, analyze, and manage their portfolios.
Why Does FDS Fall Short?
- Muted 5.5% annual revenue growth over the last two years shows its demand lagged behind its financials peers
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 8.1% annually
FactSet is trading at $289.85 per share, or 16.6x forward P/E. To fully understand why you should be careful with FDS, check out our full research report (it’s free for active Edge members).
Encore Capital Group (ECPG)
Market Cap: $1.25 billion
Operating in the often misunderstood world of debt collection since 1999, Encore Capital Group (NASDAQ:ECPG) purchases portfolios of defaulted consumer debt at deep discounts and works with individuals to recover these obligations while helping them toward financial recovery.
Why Are We Wary of ECPG?
- 1.3% 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 15.9% annually
- 11× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $55.90 per share, Encore Capital Group trades at 7.5x forward P/E. If you’re considering ECPG for your portfolio, see our FREE research report to learn more.
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