Financial companies are usually beneficiaries of a rising interest rate environment. Although 10 consecutive interest rate hikes by the Fed since last year took the Fed funds rate to the highest level since August 2007, not all financial stocks are well-positioned to benefit from it. Given their weak fundamentals, I think BRP Group, Inc. (BRP), Forge Global Holdings, Inc. (FRGE), and Argo Blockchain plc (ARBK) are best avoided now.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in the financial industry.
Financial institutions, which include banks, investment firms, credit unions, and insurance companies, offer a wide range of products and services referred to as financial services. The sector has been under pressure lately due to the bank failures. Despite assurances by the financial regulators, concerns over the sector’s stability remain.
Last week, the Federal Reserve announced its tenth interest rate hike of 25 basis points, in line with analyst expectations, taking the Fed funds rate to a range of 5% and 5.25%, the highest since August 2007. The Fed has signaled that the end of the hiking cycle could be near, but it would keep a closer look at the upcoming macroeconomic data.
Higher interest rates usually benefit financial companies, but the volatility and unpredictability of risky assets, such as cryptocurrency, have put some pressure on financial companies exposed to them. Higher interest rates also impact the demand for loans as borrowing becomes expensive.
Furthermore, insurance companies have significant exposure to fixed-rate bonds to generate income while mitigating risks. As interest rates rise, many insurance companies are stuck with short-term unrealized losses.
Let’s delve deeper into the fundamentals of BRP, FRGE, and ARBK to understand why they are best avoided now.
BRP Group, Inc. (BRP)
BRP is an insurance distribution firm delivering tailored insurance and risk management insights and solutions to its clients. It markets and sells insurance products and services in the United States. It operates through four segments: Middle Market, Specialty, MainStreet, and Medicare.
In terms of forward EV/Sales, BRP’s 2.84x is 46.8% higher than the 1.94x industry average. Its 13.08x forward EV/EBITDA is 26.4% higher than the 10.35x industry average. Likewise, its 20.07x forward non-GAAP P/E is 139.8% higher than the 8.37x industry average.
BRP’s total operating expenses for the fourth quarter ended December 31, 2022, increased 58.6% year-over-year to $312.46 million. Its operating loss widened 75.4% over the prior-year quarter to $66.42 million. The company’s net loss attributable to BRP widened 114.1% year-over-year to $48.49 million. Also, its loss per share widened 104.9% year-over-year to $0.84.
Analysts expect BRP’s EPS for the quarter ended March 31, 2023, to decline 18.7% year-over-year to $0.41. Over the past three months, the stock has declined 21.8% to close the last trading session at $24.29.
BRP’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an F grade for Quality and a D for Value. Within the F-rated Financial Services (Enterprise) industry, it is ranked #91 out of 98 stocks. Click here to see the other ratings of BRP for Growth, Momentum, Stability, and Sentiment.
Forge Global Holdings, Inc. (FRGE)
FRGE operates a financial services platform. The company offers a trading solution, a platform that connects investors with private company shareholders and enables them to facilitate private share transactions efficiently, and a custody solution, which enables clients to securely custody and manage assets. It also provides data solutions that analyze and make investment decisions in the private market.
In terms of forward Price/Sales, FRGE’s 3.02x is 55.6% higher than the 1.94x industry average.
For the fiscal year ended December 31, 2022, FRGE’s total revenues declined 45.8% year-over-year to $69.38 million. Its operating loss widened significantly to $135.04 million. The company’s adjusted EBITDA loss came in at $46.85 million, compared to an adjusted EBITDA of $8.76 million in the year-ago period.
In addition, its net loss attributable to FRGE widened 504.7% year-over-year to $111.86 million. Also, its net loss per share attributable to FRGE widened 135.3% year-over-year to $0.80.
For the quarter ended March 31, 2023, FRGE’s EPS is expected to be negative. Over the past year, the stock has declined 94.9% to close the last trading session at $1.39.
FRGE’s weak prospects are reflected in its POWR Ratings. It has an overall D rating, equating to a Sell in our rating system.
It has an F grade for Momentum and Quality and a D for Value. It is ranked #89 in the same industry. Click here to see the other ratings of FRGE for Growth, Stability, and Sentiment.
Argo Blockchain plc (ARBK)
Headquartered in London, the United Kingdom, ARBK engages in the bitcoin and other cryptocurrency mining business worldwide. It engages in mining purpose-built computers for complex cryptographic algorithms.
In terms of forward EV/Sales, ARBK’s 2.73x is 5.5% higher than the 2.58x industry average. Its 5.10x trailing-12-month Price/Book is 87.8% higher than the 2.72x industry average.
ARBK’s gross loss for the fiscal year ended December 31, 2022, came in at £34.46 million ($43.52 million), compared to a gross profit of £53.65 million ($67.75 million) in the prior-year period. Its net loss came in at £194.23 million ($245.31 million), compared to a net income of £30.77 million ($38.86 million). Its adjusted EBITDA declined 98.2% year-over-year to £979 thousand ($1.23 million).
For the quarter ended March 31, 2023, ARBK’s EPS is expected to be negative. Its revenue for the same quarter is expected to decline 43% year-over-year to $11.07 million. Over the past year, the stock has declined 81.5% to close the last trading session at $1.42.
ARBK’s POWR Ratings reflect this weak outlook. It has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
Within the Financial Services (Enterprise) industry, it is ranked #90. It has a D grade for Value and Quality. Click here to see the other ratings of ARBK for Growth, Momentum, Stability, and Sentiment.
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BRP shares were unchanged in premarket trading Monday. Year-to-date, BRP has declined -3.38%, versus a 8.44% 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.
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