Thanks to the rising interest rate environment, financial stocks are in a sweet spot as rising interest rates help financial companies, primarily banks, and insurers, expand their top line. However, not all financial stocks are well-positioned to benefit from the rising interest rates.
To that end, it could be wise for investors to avoid financial stocks BRP Group, Inc. (BRP), Marathon Digital Holdings, Inc. (MARA), and Digital World Acquisition Corp. (DWAC).
Before discussing these financial services stocks in detail, let’s discuss what’s happening in the financial sector.
The recent bank failures have kept the financial sector under pressure. Despite assurances from the financial regulators, concerns over the financial system’s stability remain. Last month amid the banking crisis, the Federal Reserve announced its ninth interest rate hike of 25 basis points, in line with analyst expectations.
Financial services companies provide services such as banking, insurance, investment management, and brokerage services. Since the pandemic, financial services stocks have gained immense popularity as they changed how individuals pay, receive, borrow, invest, or save money.
The pandemic provided the much-needed push for digital transactions. The financial services industry is expected to grow at a CAGR of 7.5% to reach $37.48 trillion by 2027. Although the rising interest rate environment benefits financial services companies, the collapse of risky assets, such as cryptocurrency, has proven to be a major dampener for companies having exposure to them.
Similarly, insurance companies have significant exposure to fixed-rate bonds as a way to generate income while mitigating risks. As interest rates rise, insurance companies are stuck with short-term unrealized losses. Moreover, higher interest rates also impact the demand for loans as it becomes more expensive to borrow money.
Amid this backdrop, it could be wise for investors to avoid fundamentally weak financial services stocks BRP, MARA, and DWAC.
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 2.87x is 50% higher than the 1.91x industry average. Its 13.20x forward EV/EBITDA is 30.5% higher than the 10.12x industry average. Likewise, its 20.73x forward non-GAAP P/E is 150.5% higher than the 8.28x 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 year, the stock has declined 7% to close the last trading session at $24.96.
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 and Stability. Within the F-rated Financial Services (Enterprise) industry, it is ranked #96 out of 102 stocks. Click here to see the other ratings of BRP for Growth, Momentum, and Sentiment.
Marathon Digital Holdings, Inc. (MARA)
MARA is a digital asset technology company focused primarily on mining cryptocurrencies in the blockchain ecosystem and operates as a digital asset generator in the U.S.
In terms of forward Price/Sales, MARA’s 3.29x is 23.5% higher than the 2.66x industry average. Its 21.12x forward EV/EBITDA is 55% higher than the 13.63x industry average. Likewise, its 66.61x forward EV/EBIT is 295.4% higher than the 16.84x industry average.
For the fiscal fourth quarter that ended December 31, 2022, MARA’s total revenues declined 58.4% year-over-year to $28.42 million. Its operating loss came in at $410.93 million, compared to an operating income of $36.11 million in the prior-year quarter.
Its net loss came in at $392.73 million, compared to a net income of $11.43 million in the year-ago period. In addition, its loss per share came in at $3.14, compared to an EPS of $0.10 in the prior-year quarter. Also, its adjusted EBITDA loss came in at $374.04 million, compared to an adjusted EBITDA of $50.91 million in the year-ago period.
For the quarter ended March 31, 2023, MARA’s EPS is expected to remain negative. Its revenue for the same quarter is expected to decline 6% year-over-year to $48.61 million. It failed to surpass Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has declined 69.8% to close the last trading session at $7.93.
MARA’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.
It has an F grade for Value, Stability, and Sentiment and a D for Momentum and Quality. It is ranked #101 in the same industry. To see MARA’s rating for Growth, click here.
Digital World Acquisition Corp. (DWAC)
DWAC is a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.
Earlier this week, former President Donald Trump was arrested and arraigned in New York over payments made to silence adult star Stormy Daniels before the 2016 election.
This news is a setback for DWAC, as it merged with the former President’s social media company, Trump Media & Technology Group (TMTG), in 2021, aiming to make the company public. Trump Media is the parent of the conservative social-media platform Truth Social.
In an August 2022 federal filing, the company stated, “If President Trump becomes less popular or there are further controversies that damage his credibility or the desire of people to use a platform associated with him, and from which he will derive financial benefit, TMTG’s results of operations, as well as the outcome of the proposed business combination could be adversely affected.”
DWAC’s net loss for the third quarter ended September 30, 2022, widened significantly to $3.79 million. Its net loss per Class A share widened 900% from the prior-year period to $0.10.
Over the past year, the stock has declined 71.7% to close the last trading session at $13.58.
DWAC’s weak prospects are reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our proprietary rating system.
It has an F grade for Growth and a D for Value, Stability, Sentiment, and Quality. Within the Financial Services (Enterprise) industry, it is ranked #100. Click here to see DWAC’s rating for Momentum.
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BRP shares were unchanged in premarket trading Thursday. Year-to-date, BRP has declined -0.72%, versus a 6.99% 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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