The Finance sector witnessed major volatility in 2018 with share prices rallying at the start of the year, followed by a substantial downtrend. Election promises fulfilled by Trump kept investors bullish at the beginning, until factors i.e. the U.S.-China trade war, uncertainty over Brexit, changing yield curve and expectations of global economic slowdown among others, began weighing on the investor sentiments.
Thus, the year that began on an optimistic note turned out to be one of the worst since the 2008 financial crisis. Over the past year, the S&P 500 and Zacks Finance sector declined 7.1% and 14.4%, respectively.
Finance companies benefit from rate hikes as higher rates lead to increase in net interest income and net interest margin. However, flattening and sometimes even inversion of the yield curve, as witnessed in the past few weeks, is bad news for the sector.
Also, as the Federal Reserve has decided to lower the number of rate hikes planned for 2019, companies will not be able to reap benefits to the full extent.
Moreover, fears of global economic slowdown, Brexit-related issues and trade war uncertainty kept customers wary and led to lower investment activities, slowdown in loan demand and decline in consumer spending in 2018. Corporate spending is likely to remain low as well until there is further clarity on trade talks with China.
Further, the artificial intelligence wave has engulfed the finance sector, leading to large investments being made by companies to withstand the growing competition. While this spending will brighten prospects of the companies, it is likely to weigh on financials in the near-term.
Elevated expenses, due to technology-related investments, are likely to partially offset the benefits of rising interest rates, and thus might impact the bottom line.
Due to these factors, companies might not have been able to generate significant returns in 2018, and are not expected to deliver solid earnings in the near term as well.
Finance Stocks to Steer Clear Of
So, we suggest avoiding some finance stocks that don’t look attractive, even in a rising rate environment.
While it’s not easy to select such stocks from the vast finance sector universe, we have taken the help of Zacks Stock Screener to make this task relatively simpler.
We have shortlisted finance stocks with a market capitalization of at least $2 billion and a VGM Score of C or D. Further, these stocks carry a Zacks Rank #4 (Sell) or 5 (Strong Sell). Finally, selected stocks that are expected to deliver negative earnings in 2019.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Eaton Vance Corporation EV: With a market cap of $4.1 billion, this investment manager currently has a Zacks Rank #4 and VGM Score of D. The company’s earnings for fiscal 2020 are expected to decline 36.8% year over year.
ProAssurance Corporation PRA: With a market cap of $2.2 billion, the insurance provider has a Zacks Rank #4 and VGM Score of D. Earnings for 2019 of the company are likely to decline 9.9% year over year.
South State Corporation SSB: On a year-over-year basis, the company’s 2019 earnings are projected to decline 2.3%. With a market cap of $3.1 billion, this bank currently has a Zacks Rank #4 and VGM Score of C.
W.R. Berkley Corporation WRB: With a market cap of $8.8 billion, this stock currently has a Zacks Rank #4 and VGM Score of D. The company’s earnings for 2019 are expected to decline 2.1% year over year.
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