Navigating the financial sector’s tumultuous waters has been incredibly challenging, especially with the unexpected collapse of Silicon Valley Bank in March. This event has cast a long shadow over the sector, causing bank shares to struggle and putting Wall Street on high alert.
Amidst this uncertainty, short-sellers and fundamental investors seeking value are looking to assess when the other shoe with drop. In this context, it’s imperative to identify the “financial services stocks to avoid.
The iShares U.S. Financial Services ETF (NYSEARCA:IYG), a popular ETF tracking banking stocks, has dipped into the red, shedding over 4.4% compared to the S&P 500‘s gain of more than 9.5%. This situation underscores the importance of assessing the risky financial stocks to avoid. Moreover, the worst-performing financial services stocks have been under discussion in this article piece.
Financial Services Stocks To Avoid: Prudential Financial (PRU)
Financial services firm Prudential Financial (NYSE:PRU) is now navigating choppy waters. Though it delivered a relatively strong performance in the first quarter, its performance in the second half of the year should have its investors in sweats. Assets under management were down 12.5% from the previous year in the first quarter, a sign for things to come ahead.
Another massive consideration for the firm is its sizeable commercial mortgage-backed securities (CMBS) portfolio. The firm is in a precarious position, with the commercial real estate market showing signs of a major downturn. A significant drop in commercial real estate values, as predicted by Morgan Stanley, is likely to have a profound impact on Prudential’s financial health.
Therefore, as we move forward, the road ahead for Prudential appears to be a mixed bag of challenges and opportunities.
Bank of Hawaii (BOH)
The Bank of Hawaii (NYSE:BOH) navigates a menacing storm in the face of a turbulent financial environment. Despite its relatively attractive valuation and dividend profile, the bank’s performance tells an entirely different story. It’s akin to “catching a falling knife,” a risky proposition for investors that could potentially lead to massive losses. BOH’s consistent underperformance compared to its sector peers and poor price performance paints a sordid picture for its future.
The bank’s first-quarter earnings report further highlights these challenges. Both its top and bottom lines missed their marks by a considerable margin. Moreover, while BOH’s diversified deposit base provided a degree of a buffer, more was needed to counterbalance these setbacks. Moreover, amid the banking crisis, the government’s stance is clear in choosing depositors over shareholders. However, as more banks teeter on the brink of failure, it’s becoming increasingly apparent that not everyone can be saved. Given these steep risks, BOH is a stock to sell.
Community Bank Systems, Inc. (CBU)
Community Bank Systems, Inc. (NYSE:CBU) is a popular regional bank headquartered in New York, serving its customers for over 150 years. Despite its stellar deposit franchise and fee-generating non-banking businesses, its growth prospects have already been factored into its lofty share price. It currently trades at almost four times forward sales estimates, almost 91% higher than the sector median.
Unfortunately for the firm, revenue growth has slowed substantially, with net interest income weakening than expected. Moreover, the bank’s non-spread income, a significant contributor to earnings, has been severely impacted by weaker equity markets. Though its credit quality is more in tune with the market, its loan growth and yield expansion have been modest. Some would look at its relatively attractive dividend yield of more than 3.5%, but if you factor in its lackluster 5-year dividend growth rates at just 5.5%, you’re likely to be disappointed.
On the date of publication, Muslim Farooque did not have (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.