Financial providers use their expertise in capital allocation and risk assessment to help facilitate economic growth while offering consumers and businesses essential financial services. Furthermore, supportive sentiment has created ideal market conditions, a trend that has enabled the industry to return 15.4% over the past six months. At the same time, the S&P 500 was up 13.1%.
Regardless of these results, investors must exercise caution as many firms are sensitive to economic cycles and regulatory changes. On that note, here are three financials stocks that may face trouble.
Northern Trust (NTRS)
Market Cap: $34.85 billion
Founded in 1889 during Chicago's post-Great Fire rebuilding boom, Northern Trust (NASDAQ: NTRS) provides wealth management, asset servicing, and banking solutions to corporations, institutions, families, and high-net-worth individuals globally.
Why Are We Wary of NTRS?
- Annual revenue growth of 6.9% over the last five years was below our standards for the financials sector
Northern Trust is trading at $190.51 per share, or 16.1x forward P/E. If you’re considering NTRS for your portfolio, see our FREE research report to learn more.
Capital Southwest (CSWC)
Market Cap: $1.61 billion
Originally founded in 1961 as a venture capital investor that helped launch Texas Instruments, Capital Southwest (NASDAQ: CSWC) is a business development company that provides debt and equity financing to middle-market companies primarily in the United States.
Why Do We Steer Clear of CSWC?
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 6.2% annually while its revenue grew
- Below-average return on equity indicates management struggled to find compelling investment opportunities
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $25.17 per share, Capital Southwest trades at 11x forward P/E. To fully understand why you should be careful with CSWC, check out our full research report (it’s free).
Atlanticus Holdings (ATLC)
Market Cap: $1.47 billion
Using data analytics to serve the millions of Americans with less-than-perfect credit scores, Atlanticus Holdings (NASDAQ: ATLC) provides technology and services that help lenders offer credit products to consumers often overlooked by traditional financing providers.
Why Does ATLC Fall Short?
- Flat earnings per share over the last four years underperformed the sector average
- 28× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Atlanticus Holdings’s stock price of $97.13 implies a valuation ratio of 8.9x forward P/E. Read our free research report to see why you should think twice about including ATLC in your portfolio.
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