The Financial Select Sector SPDR Fund ETF (NYSEARCA:XLF) is down by approximately 3% month-over-month, illustrating the interim negativity attached to the financial sector.
Interest rate uncertainty paired with inconsistent real economic factors will lead to a sectoral drawdown. Sure, some variables might combat my outlook. However, the aforementioned variables may cause credit spreads to surge in the coming months, leading to a high-pressure situation for financial stocks.
Let’s examine three financial stocks that I am bearish on.
LoanDepot (LDI)
LoanDepot (NYSE:LDI) is a U.S.-based firm that sells mortgage and non-mortgage debt products. The company operates in more than 200 locations and has executed about $179 billion in refinances and $96 billion in new home purchases.
Although its headlines suggest that it is an established company, LoanDepot operates in a cyclical industry. The firm’s cyclicality was made clear in its fourth-quarter earnings report. It communicated a revenue target miss of $7.84 million and an earnings per share (EPS) miss of seven cents.
The main culprits behind LoanDeport’s fourth-quarter earnings miss were lower volumes and growth in servicing income. I expect volumes to remain low due to the resilient mortgage rates. Alternatively, a mortgage rate pivot might lead to higher credit spreads, concurrently spiking the average household cost of debt.
Truthfully, LoanDepot’s valuation metrics aren’t bad. For example, its price-to-book ratio of 1.19x is in fair value territory. However, sustained fundamental pressure may crumble LoanDepot’s intrinsic value. Thus, I hold a bearish view of the stock.
Forge Global Holdings (FRGE)
Forge Global Holdings (NYSE:FRGE) isn’t a financial market pure play. The company operates a novel platform that facilitates private market data and trading. However, the stock is on this list due to its interim fundamental concerns. Moreover, it has interlinkages with the financial services sector’s ancillary risk factors.
The company released its fourth-quarter results in March, revealing a disappointing revenue miss of around $180,200 and an EPS miss of four cents. However, the market clearly brushed the event aside as FRGE stock has surged by more than 10% in the past month.
Despite missing out on analysts’ estimates, FRGE’s Q4 results revealed a 1% increase in trading volume to $250.4 million and a respectable net take rate of 3.2%. Nevertheless, the business is clearly growing slower than anticipated. In fact, additional headwinds could occur due to systematic reasons. This is a view shared by McKinsey, which recently stated that private markets are slowing down due to rising financing costs and macroeconomic uncertainty. Although a broad-based view, such an outcome could affect the lower end of the market, especially entry-level companies like Forge Global Holdings.
Lastly, FRGE stock’s price-to-sales ratio of 4.84x is at a sectoral median premium of approximately 82%. Therefore, I deem FRGE stock overvalued, especially considering the possible fundamental headwinds.
New York Community Bancorp (NYCB)
New York Community Bancorp (NYSE:NYCB) is a “sell the hype” stock. For context, NYCB stock is up by nearly 20% month-to-date after releasing a profitability plan that led to an upgrade by Piper Sandler (NYSE:PIPR).
The bank’s profitability plan includes repricing its loan portfolio, selling non-strategic assets and fostering better middle-market relationships. Although they sound compelling, a bank turnaround is difficult to execute, especially in the current credit climate.
Furthermore, New York Community Bancorp suffered a serious first-quarter earnings miss. The bank’s revenue fell short by $161.75 million while its EPS settled 12 cents below target. It’s difficult to believe that higher profitability is en route, especially as incoming capital adequacy amendments will make it more difficult for banks to realize higher profits.
To conclude the debate, let’s look at NYCB stock from a capital market vantage point.
NYCB stock’s price-to-book ratio of 0.36x isn’t bad at all. Nevertheless, this is a stock that surged in the past week due to rhetoric more than substance. I’m bearish on NYCB stock due to its recent financial results and what I believe was an unjustified surge in its stock price.
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
