The financial sector comprises banking, real estate, consumer finance, capital markets, and insurance segments. The increasing interest rate environment is usually favorable for companies in the financial sector, especially banks. Higher rates boost the interest income of financial institutions, thereby increasing their profitability.
The Consumer Price Index (CPI) rose 0.5% over the prior month in January and 6.4% year-over-year. Both figures came in higher than the respective 0.4% and 6.2% projections of economists polled by Dow Jones.
The higher-than-expected inflation and a robust job market in January might prompt the Fed to raise interest rates more aggressively and for a longer term. The financial industry should benefit significantly from higher interest rates since their profit margins improve when rates go up.
According to Statista, revenue in banking, finance, and insurance is expected to total $3.83 trillion in 2023 and grow at a 2.2% CAGR from 2023 to 2025.
Given this backdrop, it could be wise to buy quality financial stock Forrester Research, Inc. (FORR). However, we think SoFi Technologies, Inc. (SOFI) is best avoided now due to its weak financials and dim growth prospects.
Stock to Avoid:
SoFi Technologies, Inc. (SOFI)
SOFI offers digital financial services and operates through three segments, Lending; Technology Platform; and Financial Services. The company allows its customers to borrow, save, spend, and invest money. Additionally, it provides technological, investment, and cash management services.
The stock’s forward Price/Sales of 3.20x is 24.6% higher than the 2.57x industry average. Also, SOFI’s forward Price/Book multiple of 1.23 compares with the industry average of 1.16.
For the fourth quarter that ended December 31, 2022, SOFI’s total interest expense increased 442.8% year-over-year to $98.82 million, and its total non-interest expenses grew 25.5% year-over-year to $495.63 million. Also, the company registered a net loss and net loss per share of $40.01 million and $0.05, respectively.
Also, as of December 31, 2022, the company’s total liabilities stood at $13.48 billion, up 200.9% year-over-year.
Analysts expect SOFI to report a loss per share of $0.09 for the current fiscal first quarter ending March 2023. Moreover, the company is expected to report a loss per share of $0.07 for the next quarter (ending June 2023). The stock has plunged 4.9% over the past six months and 42.4% over the past year to close the last trading session at $7.25.
SOFI’s poor fundamentals are apparent in its POWR Ratings. The stock has an overall rating of D, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
SOFI has an F grade for Quality and Stability and a D for Value. Within the Financial Services (Enterprise) industry, it is ranked #95 of 105 stocks.
In addition to the POWR Ratings I’ve just highlighted, you can see SOFI’s ratings for Value, Growth, Sentiment, and Momentum here.
Stock to Buy:
Forrester Research, Inc. (FORR)
FORR is an independent research and advisory firm. Its segments include Research; Consulting; and Events. The company delivers content such as future trends, predictions, and market forecasts. It also provides consulting services such as strategy designing, business case building, and technology vendor selection.
On January 23, 2023, FORR launched Forrester Decisions for Partner Ecosystem Marketing, the next version of its Forrester Decisions for Channel Marketing service. Forrester Decisions service would aid partner ecosystem marketing leaders to develop, enable, and engage their partners to boost revenue growth and foster customer loyalty. This could strategically benefit the company.
FORR’s forward EV/EBITDA of 9.16x is 19% lower than the 11.32x industry average. Moreover, its forward Price/Sales multiple of 1.18 compares with the industry average of 1.43.
For the fourth quarter that ended December 31, 2022, FORR’s revenue from the Research and Events segment increased by 3% and 43.2% from the year-ago values to $92.19 million and $7.19 billion, respectively. Moreover, the company’s total revenues grew 2.4% year-over-year to $136.89 million.
Furthermore, as of December 31, 2022, the company’s outstanding debt stood at $50 million, compared to $75 million as of December 31, 2021.
The consensus revenue estimate of $556.91 million for the fiscal year ending December 2024 indicates a 5.4% year-over-year improvement. Likewise, the consensus EPS estimate of $2.67 for the same year reflects a 14.1% rise from the prior year. Also, the company surpassed its consensus EPS in all four trailing quarters, which is impressive.
Shares of FORR have gained 2.3% over the past five days to close the last trading session at $34.74.
FORR’s POWR Ratings reflect its strong outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has a Quality grade of A and a Value grade of B. It has topped the 105-stock Financial Services (Enterprise) industry.
Beyond what we stated above, we also have FORR’s ratings for Stability, Growth, Sentiment, and Momentum. Get all FORR ratings here.
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FORR shares were trading at $34.46 per share on Thursday morning, down $0.28 (-0.81%). Year-to-date, FORR has declined -3.64%, versus a 7.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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