Financial providers use their expertise in capital allocation and risk assessment to help facilitate economic growth while offering consumers and businesses essential financial services. But worries about economic uncertainty and potential market volatility have kept sentiment in check, and over the past six months, the industry's 1.9% return has trailed the S&P 500 by 7.7 percentage points.
Investors should tread carefully as many of these firms are also cyclical, and any misstep can have you catching a falling knife. On that note, here are three financials stocks we’re passing on.
Invesco (IVZ)
Market Cap: $12.31 billion
With roots dating back to 1935 when it pioneered the first mutual fund with an objective of capital growth, Invesco (NYSE:IVZ) is a global asset management firm that offers investment solutions across equities, fixed income, alternatives, and multi-asset strategies.
Why Is IVZ Risky?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Flat earnings per share over the last five years underperformed the sector average
- Low return on equity reflects management’s struggle to allocate funds effectively
Invesco is trading at $27.68 per share, or 10.3x forward P/E. Read our free research report to see why you should think twice about including IVZ in your portfolio.
Enova (ENVA)
Market Cap: $4.08 billion
Pioneering online lending since 2004 with a massive database of over 65 terabytes of customer behavior data, Enova International (NYSE:ENVA) provides online financial services including installment loans and lines of credit to non-prime consumers and small businesses in the United States and Brazil.
Why Are We Cautious About ENVA?
- High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Enova’s stock price of $163.51 implies a valuation ratio of 10.2x forward P/E. Check out our free in-depth research report to learn more about why ENVA doesn’t pass our bar.
Sixth Street Specialty Lending (TSLX)
Market Cap: $2.09 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 Avoid TSLX?
- Annual revenue growth of 5.3% over the last two years was below our standards for the financials sector
- Earnings per share were flat over the last two years while its revenue grew, showing its incremental sales were less profitable
At $22.32 per share, Sixth Street Specialty Lending trades at 11x forward P/E. Dive into our free research report to see why there are better opportunities than TSLX.
Stocks We Like More
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