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Why Shares of Axos Financial Fell in May

Lou Whiteman, The Motley Fool

What happened

Shares of Axos Financial (NYSE: AX) fell 16.5% in May, according to data provided by S&P Global Market Intelligence, as the online bank's first-quarter results were met with a negative reaction. The pressure continued as concerns about which way the Federal Reserve would be heading led to general weakness in the financial sector.

So what

Axos reported first-quarter results on the last day of April, leading to a sell-off in the shares on the first day of May. While the company reported a 9% increase in total assets to nearly $11 billion, investors were more focused on the 24% decline in net income.

A tablet displaying a falling stock chart, surrounded by a hand splayed out in alarm and a clenched fist

Image source: Getty Images.

The quarterly results led to Compass Point analyst Scott Valentin downgrading Axos from buy to neutral, given concerns about loan growth and net interest margin in the quarters to come.

Axos, which was formerly known as BofI Holding (for Bank of Internet), is also still sorting out the damage from a loss recorded by a recently acquired clearing business. The financial impact of the loss is manageable, with Axos taking a $15.3 million provision relating to the issue, but the reputational damage to a company getting burned on a recent acquisition might take longer to mend.

The rest of the month went no better, as Axos was caught up in a downdraft pressuring most of the financial services sector over concerns the Fed could lower rates, putting pressure on interest margins. Tariff-related economic uncertainty also weighed on the sector in late May, on concerns loan growth could slow.

Now what

Axos shares have rebounded somewhat in the early days of June, up 3% so far. The stock has struggled, down 33% in the last twelve months, but the company still has significant potential to grow.

Axos has grown earnings per share at an annualized rate of 27% since 2013, and book value per share has increased more than threefold during that time. Even with that growth Axos remains a relatively small bank, with assets of $10 billion compared to Bank of America's $2.325 trillion in assets, so it could continue to grow for years to come.

The missing piece of the puzzle for now is execution, and management's recent stumbles have removed some of the excitement surrounding the shares. Axos now trades at about 11.9 times earnings, compared to a multiple of 18 a year ago. If you believe the company can put its issues behind it, this could be a great time to buy in.

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Lou Whiteman owns shares of Axos Financial. The Motley Fool owns shares of and recommends Axos Financial. The Motley Fool has a disclosure policy.