Over the last several years financial stocks have gone through a roller coaster, experiencing both periods where investors are looking to buy and to sell. We are currently in one of the upswings in the sector. Financial institutions, both large and small, have benefited from the current interest rate environment. The U.S. Federal Reserve’s conquest against inflation began towards the end of the first quarter of 2022, and since then, the target federal funds rate has reached between 5.25% and 5.50%. If you look at the financial statements of the large U.S. banks, many of them have been able to widen their net interest margin, the arithmetic difference between the interest they charge on lending products and the interest they pay to depositors.
The Vanguard Financial ETF (NYSEARCA:VFH), a good indicator for the performance of the financial sector related equities, enjoyed a good rally over the past twelve months, increasing 23% over that period, which is above the performance of the vaunted S&P500.
However, a high interest rate environment is a double-edged sword, especially for financial stocks largely selling products to consumers. With that said, below are 3 financial stocks to sell before they crash and burn in July.
Affirm (AFRM)
Affirm (NASDAQ:AFRM) is a financial stock that has made several of my prior sell lists. In essence, the company enables buy-now-pay-later (BNPL) transactions wherein consumers can purchase a product via a participating merchant’s website and pay off the full purchase price of the product in installments. The way Affirm is able to scale this feature is by leveraging agreements with originating banks and other capital markets partners that effectively help to cover its costs. Despite BPNL being controversial in that they promote consumption even when it may not be in a consumer’s financial interest, Affirm’s platform continues to see growth. Especially if we look at a metric like gross merchandise value, which clocked out at around $6.2 billion in Affirm’s latest earnings report.
However, elevated rates are starting to have a toll on consumer demand and confidence, and this is not only reflected in recent macro data but also in certain aspects of Affirm’s financial figures. Affirm’s active customer growth slowed significantly to just 17% YOY growth in Q3 2024. And growth in transactions per active customer also showed signs of contraction.
Affirm’s share price has plummeted 36.9% on a year-to-date basis and a worsening consumer environment could send shares further downward. All of this makes AFRM one of the financial stocks you will want to sell.
Sofi Technologies (SOFI)
Sofi Technologies (NASDAQ:SOFI) is a lending platform that has facilitated student loans and personal loans for consumers. The platform ran into a period of prolonged losses when the U.S. government began to provide relief to holders of federal student loans by offering a payment moratorium.
In other words, students with federal loans did not have to meet their interest payment obligations, which made private lender platforms less competitive. Sofi alleged in a lawsuit against the U.S. Department of Education that “the moratorium suspended payments … eliminated the primary benefits of student loan refinancing.” The student loan platform claims it lost $300 to $400 million in revenue during the moratorium period.
With the moratorium now out of sight, Sofi’s lending platform still has yet to pick up to the growth rates it had experienced in prior times. Both Q4 2023 and Q1 2024 year-over-year revenue growth figures are in the double digits but below the growth experiences in 2022, for example.
SOFI’s stock price has yet to rebound and has, in fact, fallen 33.1% for the year.
LendingClub (LC)
LendingClub (NYSE:LC) is a financial company that offers a variety of lending products as well as deposit and savings accounts for consumers. In particular, the platform provides loan products, including unsecured personal loans, secured auto refinance loans and patient and education finance loans. LendingClub’s loan assets continue to rise in a stable fashion, despite a high-interest rate environment. However, deposit costs have begun to bite into the firm’s revenue growth. LendingClub’s revenue has in fact contracted since Q2 2023, and higher interest payments made to depositors is definitely a factor.
In the company’s Q2 earnings press release for 2024, LendingClub stated, “net interest income of $122.9 million, compared to $131.5 million in the prior quarter, reflecting a shift in asset mix from held for investment loans to senior securities and higher deposit funding costs.” That is to say, because LendingClub is a smaller financial institution it has to compete with attractive deposit rates in order to keep consumers on its platform. This leads to narrowing net interest margin in the long-term.
LC is definitely one of the financial stocks to sell from your portfolio sooner rather than later. Shares have fallen 15.4% over the past 12 months and more than 56% if we zoom out over the past 3 years.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.