The possibility of debt default has sent shockwaves through Wall Street, leaving the financial services sector bracing for potential fallout. Adding to the concerns, warnings of an impending recession in the second half of 2023 have heightened the overall risk landscape for the financial sector.
As June approaches, economic uncertainty grows. Therefore, I think investors should beware of vulnerable financial services stocks BRP Group, Inc. (BRP), Digital World Acquisition Corp. (DWAC), and SAI.TECH Global Corporation (SAI), which are rated an F (Strong Sell) in our proprietary rating system.
With talks of raising the U.S. government's massive $31.40 trillion debt ceiling reaching a critical stage, the financial sector is bracing itself for the potential fallout of a default. While the financial industry has faced such crises in the past, the current situation has heightened concerns among Wall Street banks and asset managers due to the tight timeframe for reaching a compromise.
As the deadline of June 1, 2023, approaches, Treasury Secretary Janet Yellen reiterated the warning from the Treasury Department that the federal government might be unable to fulfill all its debt obligations.
Moreover, the past year witnessed a decline in M&A activity on Wall Street as dealmakers grappled with rising interest rates and concerns of an impending recession. While there were signs of a potential recovery in dealmaking earlier this year, the uncertainty surrounding the self-imposed debt limit and the possibility of a U.S. default have hampered the resurgence.
Furthermore, the high chance of a recession this year is yet another threat to the US financial services sector. Economists have been beating drums, predicting an upcoming downturn and warning of an impending US recession in the second half of 2023.
Given the backdrop, let's analyze the above-mentioned stocks and see why they are worth avoiding:
BRP Group, Inc. (BRP)
BRP is an insurance distribution firm delivering tailored insurance and risk management insights and solutions to its clients. It operates through four segments: Middle Market; Specialty; MainStreet; and Medicare.
BRP’s trailing-12-month gross profit margin of 25.43% is 56.9% lower than the industry average of 59.02%. Its trailing-12-month negative EBIT margin of 0.21% is comparatively lower than the 21.10% industry average.
In terms of forward EV/EBIT multiple, BRP is currently trading at 274.83, which is significantly higher than the 11.18 industry average. Its 18.38x forward non-GAAP P/E is 118.5% higher than the 8.41x industry average.
BRP’s total operating expenses for the fiscal first quarter ended March 31, 2022, increased 60.9% year-over-year to $326.83 million. Its operating income declined 90.9% over the prior-year quarter to $3.62 million.
The company’s adjusted net income declined 14.6% year-over-year to $49.16 million, while adjusted EPS decreased 16% year-over-year to $0.84.
Analysts expect BRP’s revenue and EPS to amount to $1.21 billion and $1.20 in the fiscal year 2023.
Over the past nine months, the stock has declined 27.5% to close the last trading session at $22.38. It has fallen 10.9% over the past month. It has a 24-month beta of 1.63.
BRP’s poor 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 Growth, Value, and Sentiment. Within the D-rated Financial Services (Enterprise) industry, it is ranked #99 out of 101 stocks.
Beyond what is stated above, we’ve also rated BRP for Stability and Momentum. Get all BRP ratings 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. The company intends to identify on technology-focused companies in the SaaS and technology, or fintech and financial services sector in the Americas.
On May 16, 2023, DWAC notified that it was experiencing a delay in filing its Form 10-Q for the quarterly period ended March 31, 2023. The company announced it requires additional time and effort to prepare the financial statements for that period, resulting in the delay.
Moreover, on April 25, DWAC disclosed that it had received an anticipated letter from Nasdaq's Listing Qualifications Department, informing the company that it was not in compliance with Nasdaq Listing Rule 5250(c)(1) due to its failure to submit the Annual Report on Form 10-K for the period ended December 31, 2022, to the Securities and Exchange Commission. However, the company has filed the annual report currently.
DWAC’s formation and operating costs rose 1435.7% year-over-year to $ 18.30 million in the fiscal year that ended December 31, 2022. Its net loss grew 999.4% from the prior year to $15.22 million, and net loss per Class A share increased 412.5% from the year-over-year to $0.41.
Over the past year, the stock has declined 70.5% to close the last trading session at $13.28. It has also declined 41.6% over the past six months. The stock has a 24-month beta of 3.64.
DWAC’s grim prospects are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system.
It has an F grade for Growth and Value and a D for Stability, Sentiment, and Quality. Within the same industry, it is ranked last.
Click here to access DWAC’s rating for Momentum.
SAI.TECH Global Corporation (SAI)
Based in Singapore, SAI operates as an energy-saving Bitcoin mining operator and a clean-tech company that integrates the bitcoin mining, power, and heating industries worldwide. The company provides a suite of specialized services, including mining machines purchase, hosting, mining pool, and energy-saving technologies and solutions to digital asset mining customers.
SAI’s trailing-12-month gross profit margin of 10.72% is 78.1% lower than the industry average of 48.99%. Its trailing-12-month negative EBIT and EBITDA margins of 61.23% and 47.08% are lower than the industry averages of 4.69% and 8.92%.
SAI’s trailing-12-month EV/Sales of 310x is 10% higher than the industry average of 2.82x. It's trailing-12-month P/S multiple of 3.45 is 26.2% higher than the industry average of 2.73.
During the fiscal year that ended December 31, 2022, SAI’s revenue declined by 37.6% year-over-year to $10.64 million. Its gross profit fell 9.8% from the prior year to $1.14 million. Moreover, the company’s loss from operations came in at $7.47 million, and net loss amounted to $8.85 million.
The stock has fallen 70.9% over the past year and 38.3% over the past month, closing the last trading session at $1.79.
It is no surprise that SAI has an overall rating of F which translates to a Strong Sell in our POWR Ratings system.
The stock has an F grade for Quality and a D for Growth, Value, Momentum, and Stability. SAI is ranked #100 in the same industry.
One can see SAI’s Sentiment rating here.
The Bear Market is NOT Over…
That is why you need to discover this timely presentation with a trading plan and top picks from 40-year investment veteran Steve Reitmeister:
REVISED: 2023 Stock Market Outlook >
BRP shares were trading at $22.29 per share on Tuesday morning, down $0.09 (-0.40%). Year-to-date, BRP has declined -11.34%, versus a 9.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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