The Finance sector, which has been in the spotlight since the U.S. Presidential elections in November 2016, reported impressive first-quarter 2018 results. Per the latest Earnings Preview, the S&P 500 finance stocks recorded 24.7% year-over-year earnings improvement. This was mainly driven by favorable macroeconomic factors, higher interest rates, decent loan and deposit growth, and lower tax rates.
So far this year, the Financial Select Sector SPDR ETF (XLF - Free Report) , which tracks the overall S&P Financial Select Sector Index, is up nearly 1.2%. The bullish trend is expected to continue, going forward.
Performance of finance sector is directly related to the healthy of the economy. Per the ‘advance’ estimate released by the Bureau of Economic Analysis, real GDP increased 2.3% in first-quarter 2018. Driven by this favorable backdrop, performance of finance sector stocks will likely improve further as the U.S. economy continues to gain strength.
Additionally, the Federal Reserve’s hawkish stance will support the stocks’ financials. Barring REITs, the other components of the Finance sector — banks, brokerage firms, asset managers and insurers — benefit from higher rates. The steeper yield curve helps the financial stocks to improve revenues.
Moreover, as the bill on rolling back of the 2010 Dodd-Frank legislation is expected to become a law soon, finance stocks are expected to reap benefits. The bill is aimed at lowering compliance costs and hence will help boost profitability.
Apart from these, the new tax legislation will lower effective tax rates for almost all finance sector stocks. This will, thus, enable them to earn more profit. Reduced tax rates are expected to provide further stimulus to the economy, therefore indirectly to the finance sector.
Despite these positive factors, there are quite a few finance stocks that are not expected to perform well, mostly owing to some fundamental weaknesses. So, one should reassess portfolio holdings in the light of the present environment and dump the worst performing stocks right away.
5 Finance Sector Stocks to Avoid
Selecting stocks to dump could be a bit tricky. However, with the assistance of the Zacks Stock Screener, one can locate stocks with a red flag.
One could begin by selecting stocks that have lost more than 5% value year to date. Further, stocks that witnessed downward estimate revisions (over the past four weeks) for the current year are likely to plunge the most and should be dumped.
Additionally, these stocks have a market cap of $3 billion or more. Under no circumstances one should buy a stock with a Zacks Rank #4 (Sell) or 5 (Strong Sell) coupled with a VGM Score of D or F.
(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)
Here are the five finance stocks that should be avoided now:
Invesco Ltd. (IVZ - Free Report) , headquartered in Atlanta, GA, is an investment management company. This Zacks Rank #4 stock, which has a VGM Score of D, has plunged 21.9% year to date. Further, the company’s current-year earnings estimates have been revised 5% downward over the last 30 days.
New York Community Bancorp, Inc. (NYCB - Free Report) , based in Westbury, NY, offers banking products and financial services. This Zacks Rank #5 stock, with a VGM Score of D, has declined 9.2% year to date. Further, the company’s current-year earnings estimates have been revised 4.7% downward over the last 30 days.
Headquartered in New York, American International Group, Inc. (AIG - Free Report) provides insurance products. This Zacks Rank #5 stock, which has a VGM Score of F, fell 11.2% year to date. Also, the company’s current earnings estimates have moved 9.3% lower over the last 30 days.
Based in Charlotte, NC, LendingTree, Inc. (TREE - Free Report) operates as an online loan marketplace for consumers seeking loans and other credit-based offerings. This Zacks Rank #5 stock has a VGM Score of D. Shares of the company have lost 18% so far this year. The 2018 earnings estimates have been revised 5.7% down over the last 30 days.
Cincinnati Financial Corporation (CINF - Free Report) offers property casualty insurance products. Fairfield, OH-based company carries a Zacks Rank #5 and has a VGM Score of D. So far this year, the stock has declined 5.9%. Additionally, the 2018 earnings estimate was revised 10% down over the last 30 days.
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