Financial institutions play a critical role, offering everything from consumer banking to wealth management and specialized financial solutions. But worries about economic uncertainty and potential market volatility have kept sentiment in check, and over the past six months, the industry has tumbled by 1.1%. This drop was disappointing since the S&P 500 climbed 8.5%.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. On that note, here are two financials stocks we think can generate sustainable market-beating returns and one we’re swiping left on.
One Financials Stock to Sell:
Affirm (AFRM)
Market Cap: $22.27 billion
Founded by PayPal co-founder Max Levchin with a mission to create honest financial products, Affirm (NASDAQ: AFRM) provides a payment network that allows consumers to make purchases and pay for them over time with transparent, flexible installment loans.
Why Are We Wary of AFRM?
- Push for growth has led to negative returns on capital, signaling value destruction
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $81.34 per share, Affirm trades at 21.8x forward P/E. To fully understand why you should be careful with AFRM, check out our full research report (it’s free).
Two Financials Stocks to Watch:
Synchrony Financial (SYF)
Market Cap: $24.33 billion
Powering over 73 million active accounts and partnerships with major brands like Amazon, PayPal, and Lowe's, Synchrony Financial (NYSE: SYF) provides credit cards, installment loans, and banking products through partnerships with retailers, healthcare providers, and digital platforms.
Why Are We Bullish on SYF?
- Earnings growth has trumped its peers over the last two years as its EPS has compounded at 37.9% annually
- Annual tangible book value per share growth of 15.9% over the past five years was outstanding, reflecting strong capital accumulation this cycle
- Industry-leading 22.2% return on equity demonstrates management’s skill in finding high-return investments
Synchrony Financial is trading at $76.30 per share, or 8.2x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
PJT (PJT)
Market Cap: $3.98 billion
Spun off from Blackstone in 2015 and founded by former Morgan Stanley executive Paul J. Taubman, PJT Partners (NYSE: PJT) is an advisory-focused investment bank that provides strategic advice, restructuring services, and fundraising solutions to corporations, boards, and investment firms.
Why Does PJT Catch Our Eye?
- Annual revenue growth of 18.7% over the last two years was superb and indicates its market share increased during this cycle
- Incremental sales over the last two years have been highly profitable as its earnings per share increased by 42% annually, topping its revenue gains
- Market-beating return on equity illustrates that management has a knack for investing in profitable ventures
PJT’s stock price of $150.91 implies a valuation ratio of 19x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free.
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