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Meeting market expectations, the Federal Reserve increased its benchmark interest rate yesterday, acknowledging continued improvement in the U.S. labor market and expanding economic activity. The Federal Open Market Committee raised the target range for the federal funds rate by 25 basis points to 0.50-0.75% from 0.25-0.50%.
Further, signaling confidence in the U.S. economy, the Fed expects three rate hikes in 2017 instead of the previous forecast of two.
While the rate hike is largely seen as a dampener for sectors such as utility and telecommunications because of the resultant increase in their borrowing costs, the major gainer, as usual, is the finance sector. This is because all industries, except REITs, within this sector tend to benefit from rising rates.
Hence, when it comes to picking stocks in a rate hike scenario, finance stocks are essentially seen as attractive bets. However, not all stocks within the finance industries that are likely to benefit from the rate hike can help you ride the wave. In fact, staying away from some finance stocks, even after the rate hike, could be a wise decision.
Stocks to Avoid
While it’s not easy to select such stocks from the vast finance sector, we have made this task relatively simpler with the help of Zacks Stock Screener.
We have shortlisted five stocks with a market capitalization of at least $500 million and a Momentum Score of ‘F.’ Further, these stocks carry a Zacks Rank #4 (Sell) or #5 (Strong Sell).
Ally Financial Inc. (ALLY - Free Report) : This Detroit, MI-based company is a part of the Zacks categorized Consumer Loans industry. It offers a broad array of financial products and services, primarily to automotive dealers and their customers in the U.S. The company has forayed into the mortgage business, made efforts to improve its digital offerings and launch new products to enhance profitability.
However, the company’s high debt level remains a concern. Also, the near-term guidance is not too impressive. Management expects net interest margin to decline in the fourth quarter of 2016 due to seasonality, though the same is expected to bounce back in the first half of 2017. Lease revenues are projected to decline due to management’s expectation of a 5% decrease in used vehicle prices in 2016 and 2017. Further, in the retail auto portfolio, it expects to witness higher losses and provisions in 2017.
We see limited upside for the stock in the near term, as it carries a Zacks Rank #4. Over the past 60 days, the Zacks Consensus Estimate for the company has revised 4.9% downward to $2.14 per share for 2016. Further, Ally Financial gained 5.5% year to date, underperforming the 16.8% growth recorded in the Consumer Loans industry.
Euronet Worldwide, Inc. (EEFT - Free Report) : Based in Leawood, KS, the company under the Miscellaneous Financial Services industry provides payment and transaction processing solutions to financial institutions, retailers and service providers as well as individual consumers globally. While the company is well positioned to benefit from the growing electronic payment business, geopolitical risks and global growth concerns remain overhangs.
Notably, last month, the company released and updated guidance for fourth quarter 2016 to reflect the impact of continued cash supply shortages in India owing to the country’s demonetization move and strengthening of the U.S. dollar against several currencies of the countries where Euronet operates. It expects these two items to affect fourth quarter adjusted earnings per share by about 7–9 cents and updated its EPS guidance in the range of 98 cents to $1.
Over the past 60 days, this Zacks Rank #4 stock witnessed its current year estimates revising nearly 2% downward to $3.78 per share. Also, year to date, Euronet gained just 1% compared to 3.9% increase in Miscellaneous Financial Services industry.
United Insurance Holdings Corp. ): The St. Petersburg, FL-based company in the Property & Casualty Insurance industry is engaged in sourcing, writing and servicing residential and commercial property and casualty insurance policies. The company’s third-quarter 2016 earnings decreased 58% year over year to 16 cents. Apart from Hurricane Hermine and the Louisiana storms, the company’s bulk loss ratio deterioration was largely due to increases in fire and hail losses in Florida and the Northeast region. The quarter witnessed higher combined ratio owing to the company’s exposure to catastrophe losses.
Further, the picture for fourth-quarter 2016 is not impressive as well. The company stated that it has received more than 5,000 claims related to Hurricane Matthew and expects to incur $30 million of pre-tax catastrophe losses (net of reinsurance recoveries) during the fourth quarter.
Currently, the company carries a Zacks Rank #4. Over the past 60 days, the Zacks Consensus Estimate for the company declined significantly to 41 cents per share for 2016. Notably, the company lost 11.7% year to date compared to 21.7% gain in the Property & Casualty Insurance industry.
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3 Financial Stocks to Avoid Despite Fed Rate Hike
Meeting market expectations, the Federal Reserve increased its benchmark interest rate yesterday, acknowledging continued improvement in the U.S. labor market and expanding economic activity. The Federal Open Market Committee raised the target range for the federal funds rate by 25 basis points to 0.50-0.75% from 0.25-0.50%.
Further, signaling confidence in the U.S. economy, the Fed expects three rate hikes in 2017 instead of the previous forecast of two.
While the rate hike is largely seen as a dampener for sectors such as utility and telecommunications because of the resultant increase in their borrowing costs, the major gainer, as usual, is the finance sector. This is because all industries, except REITs, within this sector tend to benefit from rising rates.
Hence, when it comes to picking stocks in a rate hike scenario, finance stocks are essentially seen as attractive bets. However, not all stocks within the finance industries that are likely to benefit from the rate hike can help you ride the wave. In fact, staying away from some finance stocks, even after the rate hike, could be a wise decision.
Stocks to Avoid
While it’s not easy to select such stocks from the vast finance sector, we have made this task relatively simpler with the help of Zacks Stock Screener.
We have shortlisted five stocks with a market capitalization of at least $500 million and a Momentum Score of ‘F.’ Further, these stocks carry a Zacks Rank #4 (Sell) or #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Ally Financial Inc. (ALLY - Free Report) : This Detroit, MI-based company is a part of the Zacks categorized Consumer Loans industry. It offers a broad array of financial products and services, primarily to automotive dealers and their customers in the U.S. The company has forayed into the mortgage business, made efforts to improve its digital offerings and launch new products to enhance profitability.
However, the company’s high debt level remains a concern. Also, the near-term guidance is not too impressive. Management expects net interest margin to decline in the fourth quarter of 2016 due to seasonality, though the same is expected to bounce back in the first half of 2017. Lease revenues are projected to decline due to management’s expectation of a 5% decrease in used vehicle prices in 2016 and 2017. Further, in the retail auto portfolio, it expects to witness higher losses and provisions in 2017.
We see limited upside for the stock in the near term, as it carries a Zacks Rank #4. Over the past 60 days, the Zacks Consensus Estimate for the company has revised 4.9% downward to $2.14 per share for 2016. Further, Ally Financial gained 5.5% year to date, underperforming the 16.8% growth recorded in the Consumer Loans industry.
Euronet Worldwide, Inc. (EEFT - Free Report) : Based in Leawood, KS, the company under the Miscellaneous Financial Services industry provides payment and transaction processing solutions to financial institutions, retailers and service providers as well as individual consumers globally. While the company is well positioned to benefit from the growing electronic payment business, geopolitical risks and global growth concerns remain overhangs.
Notably, last month, the company released and updated guidance for fourth quarter 2016 to reflect the impact of continued cash supply shortages in India owing to the country’s demonetization move and strengthening of the U.S. dollar against several currencies of the countries where Euronet operates. It expects these two items to affect fourth quarter adjusted earnings per share by about 7–9 cents and updated its EPS guidance in the range of 98 cents to $1.
Over the past 60 days, this Zacks Rank #4 stock witnessed its current year estimates revising nearly 2% downward to $3.78 per share. Also, year to date, Euronet gained just 1% compared to 3.9% increase in Miscellaneous Financial Services industry.
United Insurance Holdings Corp. ): The St. Petersburg, FL-based company in the Property & Casualty Insurance industry is engaged in sourcing, writing and servicing residential and commercial property and casualty insurance policies. The company’s third-quarter 2016 earnings decreased 58% year over year to 16 cents. Apart from Hurricane Hermine and the Louisiana storms, the company’s bulk loss ratio deterioration was largely due to increases in fire and hail losses in Florida and the Northeast region. The quarter witnessed higher combined ratio owing to the company’s exposure to catastrophe losses.
Further, the picture for fourth-quarter 2016 is not impressive as well. The company stated that it has received more than 5,000 claims related to Hurricane Matthew and expects to incur $30 million of pre-tax catastrophe losses (net of reinsurance recoveries) during the fourth quarter.
Currently, the company carries a Zacks Rank #4. Over the past 60 days, the Zacks Consensus Estimate for the company declined significantly to 41 cents per share for 2016. Notably, the company lost 11.7% year to date compared to 21.7% gain in the Property & Casualty Insurance industry.
Zacks' Best Investment Ideas for Long-Term Profit
Today you can gain access to long-term trades with double and triple-digit profit potential rarely available to the public. Starting now, you can look inside our stocks under $10, home run and value stock portfolios, plus more. Want a peek at this private information? Click here >>