LM Funding America Inc (NASDAQ:LMFA), a USD$8.51M small-cap, is a financial services company operating in an industry, which tends to draw the more conservative investors who attracted by their steady revenue, the protection against volatility, and the above-average dividend yields. However, more recently, poor management decisions, such as those involved in subprime loans and derivatives, significantly raised operating risk, limiting the industry's investment suitability to those who are less risk averse. Financial services analysts are forecasting for the entire industry, negative growth in the upcoming year, and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the US stock market as a whole. Is the diversified financial services industry an attractive sector-play right now? In this article, I’ll take you through the sector growth expectations, and also determine whether LMFA is a laggard or leader relative to its financial sector peers. Check out our latest analysis for LM Funding America
What’s the catalyst for LMFA's sector growth?
diversified financial services Recently, government and overseas regulators involvement has increased to play a prominent role, closely examining and controlling day-to-day business administration of certain companies. In the past year, the industry delivered negative growth of -14 percent, underperforming the US market growth of 14 percent. LMFA lags the pack with its negative growth rate of -1980 percent over the past year, which indicates the company will be growing at a slower pace than its diversified financial services peers. As the company trails the rest of the industry in terms of growth, LMFA may also be a cheaper stock relative to its peers.
Is LMFA and the sector relatively cheap?
Financial services companies are typically trading at a PE of 20 times, lower than the rest of the US stock market PE of 32 times. This means the industry, on average, is relatively undervalued compared to the wider market - a potential mispricing opportunity here! Though, the industry did returned a lower 8 percent compared to the market’s 20 percent, which may explain the lower relative valuation. Since LMFA’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge LMFA’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? LMFA has been a financial services industry laggard in the past year. If your initial investment thesis is around the growth prospects of LMFA, there are other financial services companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how LMFA fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If LMFA has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its financial services peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at LMFA’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into LM Funding America's stock, take a look at the company's latest free analysis report to find out more on its financial health and other fundamentals. Interested in other financial stocks instead? Use our free playform to see my list of over 600 other financial companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.