Valley National Bank has had an impressive run over the past six months as its shares have beaten the S&P 500 by 9.6%. The stock now trades at $13.86, marking a 17.1% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Valley National Bank, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Valley National Bank Will Underperform?

We’re glad investors have benefited from the price increase, but we’re swiping left on Valley National Bank for now. Here are three reasons why there are better opportunities than VLY, plus one stock we’d rather own.

1. Net Interest Income Points to Soft Demand

Our experience and research show the market cares primarily about a bank’s net interest income growth as one-time fees are considered a lower-quality and non-recurring revenue source.

Valley National Bank’s net interest income has grown at a 9.6% annualized rate over the last five years, slightly worse than the broader banking industry and in line with its total revenue. Its growth was driven by an increase in its net interest margin, which represents how much a bank earns in relation to its outstanding loans, as its loan book shrank throughout that period.

2. Low Net Interest Margin Reveals Weak Loan Book Profitability

Net interest margin (NIM) serves as a critical gauge of a bank’s fundamental profitability by showing the spread between interest income and interest expenses. It’s essential for understanding whether a firm can sustainably generate returns from its lending operations.

Over the past two years, we can see that Valley National Bank’s net interest margin averaged a weak 3%, meaning it must compensate for lower profitability through increased loan originations.

3. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.

Valley National Bank’s EPS grew at a weak 1.5% compounded annual growth rate over the last five years, lower than its 9.6% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

Final Judgment

We cheer for all companies supporting the economy, but in the case of Valley National Bank, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 1× forward P/B (or $13.86 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.

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