The Federal Reserve’s benchmark interest rate is now at its highest level in 22 years. While the higher interest rates pose a big challenge for most industries, it is a boon for the financial sector. With interest rates unlikely to be cut this year, the financial industry could continue to benefit from the highest interest rates.
Amid this backdrop, buying financial stocks CPI Card Group Inc. (PMTS) and Medallion Financial Corp. (MFIN) could be wise. On the other hand, despite weak fundamentals, it could be worth watching SoFi Technologies, Inc. (SOFI) due to its strong growth prospects.
Before diving deeper into the fundamentals of these stocks, let’s take a closer look at why the financial sector is expected to perform well.
After performing poorly earlier this year, the stock market rebounded strongly. However, financial stocks have underperformed, as is evident from the Financial Select Sector SPDR ETF’s (XLF) 2.9% gain since the start of the year, compared to the S&P 500’s 19.3% year-to-date gain.
The benchmark interest rates are now in the range of 5.25% and 5.5%, and with the possibility of another rate hike at the next FOMC meeting in September, financial services companies are expected to benefit. Moreover, companies from this sector are leveraging technologies like artificial intelligence (AI), blockchain, etc., to help make financial transactions more seamless.
Additionally, the sector is expected to perform well with the ever-rising demand for digital financial services like wealth management, online banking, consumer credit, and digital payments. The global financial services market is expected to grow at a CAGR of 7.5% to reach $37.48 trillion by 2027.
Let’s take a closer look at their fundamentals.
Stocks to Buy:
CPI Card Group Inc. (PMTS)
PMTS designs, produces, personalizes data, packaging, and fulfills financial payment cards. The company operates through three segments: Debit and Credit, Prepaid Debit, and Other.
In terms of the trailing-12-month net income margin, PMTS’ 8.54% is 309.5% higher than the 2.08% industry average. Likewise, its 16.85% trailing-12-month EBIT margin is 280.5% higher than the industry average of 4.43%. Furthermore, the stock’s 3.89% trailing-12-month Capex/Sales is 62.7% higher than the industry average of 2.39%.
For the fiscal first quarter ended March 31, 2023, PMTS’ total net sales increased 8.5% year-over-year to $120.85 million. Its adjusted EBITDA rose 11.2% over the prior-year quarter to $25.06 million. The company’s net income increased 81.2% year-over-year to $10.87 million. In addition, its EPS came in at $0.91, representing an increase of 78.4% year-over-year.
For the quarter ending September 30, 2023, PMTS’ EPS is expected to increase 13.9% year-over-year to $1.15. Its revenue for the same quarter is expected to increase 7.8% year-over-year to $134.30 million. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 35.1% to close the last trading session at $23.57.
PMTS’ POWR Ratings reflect this positive outlook. PMTS has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the Financial Services (Enterprise) industry, it is ranked #3 out of 99 stocks. It has a B grade for Growth, Value, and Sentiment. To see the other ratings of PMTS for Momentum, Stability, and Quality, click here.
Medallion Financial Corp. (MFIN)
MFIN operates as a finance company. The company operates through four segments: Recreation Lending, Home Improvement Lending, Commercial Lending, and Medallion Lending. It provides loans that finance consumer purchases of recreational vehicles, boats, and trailers; consumer home improvements; commercial businesses; and taxi medallions to individuals and small to mid-size businesses.
On June 1, 2023, MFIN announced that it had entered into a definitive agreement with CreditWorks to provide loans through Credit4Work! Financial benefit program. Medallion Bank’s President and CEO, Donald Poulton, said, “We are pleased to add CreditWorks to our strategic partnership program as we continue to expand our lending reach.”
“We believe we can help CreditWorks scale the Credit4Work! Program nationally with our proven lending platform, comprehensive compliance framework, credit risk management, and ongoing monitoring and testing,” he added.
In terms of the trailing-12-month gross profit margin, MFIN’s 86.20% is 46.1% higher than the 59.02% industry average. Likewise, its 55.21% trailing-12-month EBITDA margin is 166.2% higher than the industry average of 20.74%. Furthermore, the stock’s 54.30% trailing-12-month EBIT margin is 168.1% higher than the industry average of 20.25%.
MFIN’s net interest income for the second quarter ended June 30, 2023, increased 20.1% year-over-year to $46.69 million. Its total interest income rose 31% over the prior-year quarter to $61.73 million. Net income attributable to MFIN increased 6.5% year-over-year to $14.17 million. In addition, its EPS came in at $0.62, representing an increase of 14.8% year-over-year.
Analysts expect MFIN’s EPS and revenue for the quarter ending September 30, 2023, to increase 41.7% and 12.5% year-over-year to $0.45 and $47.28 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 58.3% to close the last trading session at $9.40.
MFIN’s POWR Ratings reflect this positive outlook. It has an overall rating of A, which translates to Strong Buy in our proprietary rating system.
It is ranked first in the same industry. It has a B grade for Value, Stability, and Quality. Click here to see the other ratings of MFIN for Growth, Momentum, and Sentiment.
Stock to Watch:
SoFi Technologies, Inc. (SOFI)
SOFI provides various financial services. It operates through three segments: Lending, Technology Platform, and Financial Services. The company offers lending, financial services, and products, allowing its members to borrow, save, spend, invest, and protect money. It also provides personal loans, student loans, home loans, and related services.
SOFI’s trailing-12-month net income margin of negative 14.68% compares to the 25.66% industry average. Likewise, its trailing-12-month Return on Common Equity is negative 5.46% compared to the 11.22% industry average. Furthermore, the stock’s 0.10x trailing-12-month asset turnover ratio is 52.1% lower than the 0.20x industry average.
However, the company possesses an impressive growth story. SOFI’s revenue grew at a CAGR of 50.8% over the past three years. Moreover, its total assets grew at a CAGR of 37.6% over the past three years.
SOFI’s total noninterest expense rose 19.4% year-over-year to $547.35 million for the second quarter ended June 30, 2023. Its net loss narrowed 50.4% year-over-year to $47.55 million. Also, its loss per share narrowed 50% year-over-year to $0.06. In addition, its total noninterest income from the Lending segment declined 30.4% over the prior-year quarter to $99.56 million.
Street expects SOFI’s EPS for the quarter ending September 30, 2023, to remain negative. On the other hand, its revenue for the same quarter is expected to increase 22.6% year-over-year to $513.95 million, respectively. Over the past month, the stock has gained 7.7% to close the last trading session at $9.55.
SOFI’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system.
It is ranked #92 in the same industry. The stock has a B grade for Growth. However, it has an F grade for Stability and a D for Value, Sentiment, and Quality. Click here to see SOFI’s rating for Momentum.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
SOFI shares were trading at $11.23 per share on Monday morning, up $1.68 (+17.59%). Year-to-date, SOFI has gained 143.60%, versus a 20.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
2 Financial Stocks to Buy in August, 1 to Watch for Growth StockNews.com
