Financial firms serve as the backbone of the economy, providing essential services from lending and investment management to risk management and payment processing. These companies have benefited from increased market activity and economic fundamentals, so it’s no surprise the industry has posted a 15.4% gain over the past six months, beating the S&P 500 by 2.3 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. Taking that into account, here is one resilient financials stock at the top of our wish list and two we would avoid.
Two Financials Stocks to Sell:
Moelis (MC)
Market Cap: $4.84 billion
Founded in 2007 by veteran banker Ken Moelis during the lead-up to the financial crisis, Moelis & Company (NYSE:MC) is an independent investment bank that provides strategic and financial advisory services to corporations, financial sponsors, governments, and sovereign wealth funds.
Why Does MC Give Us Pause?
- Annual revenue growth of 4.9% over the last five years was below our standards for the financials sector
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 9.1% annually while its revenue grew
- Tangible book value per share stagnated over the last five years, limiting its ability to leverage its balance sheet to make additional investments
At $65.40 per share, Moelis trades at 19.4x forward P/E. Dive into our free research report to see why there are better opportunities than MC.
Sixth Street Specialty Lending (TSLX)
Market Cap: $1.70 billion
Originally launched as TPG Specialty Lending before rebranding in 2020, Sixth Street Specialty Lending (NYSE:TSLX) is a business development company that provides customized financing solutions to middle-market companies across various industries.
Why Do We Pass on TSLX?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 7.1% annually over the last two years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
Sixth Street Specialty Lending is trading at $17.92 per share, or 10.1x forward P/E. To fully understand why you should be careful with TSLX, check out our full research report (it’s free).
One Financials Stock to Buy:
WisdomTree (WT)
Market Cap: $3.53 billion
Originally founded as a financial media company before pivoting to ETF management in 2006, WisdomTree (NYSE:WT) is a financial services company that creates and manages exchange-traded funds (ETFs) and other investment products for individual and institutional investors.
Why Will WT Beat the Market?
- Impressive 25.9% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Performance over the past two years was turbocharged by share buybacks, which enabled its earnings per share to grow faster than its revenue
- Market-beating return on equity illustrates that management has a knack for investing in profitable ventures
WisdomTree’s stock price of $23.95 implies a valuation ratio of 19.6x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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