New York City’s Carver Bancorp, Inc. (CARV - Get Rating) is the holding company of certified minority depository institution Carver Federal Savings Bank. The federally chartered savings bank has been designated a Community Development Financial Institution by the U.S. Treasury Department owing to its community-focused banking services.

As one of the most shorted stocks in the market, CARV is currently being targeted by retail investors to trigger a short squeeze.

Approximately 68.2% of CARV’s floating shares have been sold short, which has attracted meme stock investors. It is a frequently discussed stock across popular Reddit forums r/pennystocks and r/wallstreetbetsHIGH. The stock has gained 119.1% over the past five days, and 234.4% year-to-date, to close yesterday’s trading session at $21.70.

Here’s what we think could shape CARV’s performance in the near term:

Poor Financials and Weak Capital Structure

Despite having a $90.19 million market capitalization, CARV’s trailing-12-month revenues came in at $22.19 million. Furthermore, the company’s revenues have declined at a 12.7% rate  per year over the past three years. Its net loss came in at $3.19 million, translating to a $1.14 loss per share. CARV’s trailing-12-month ROE and ROA stood at negative 7.7% and 0.62%, respectively.

CARV’s $75.69 million total cash balance exceeds its $53.23 million in total debt. This indicates the company is bearing an  interest burden on outstanding debt despite having significant cash reserves.

Institutional Investor Stake

David Lu, former President and managing member of HedgeHog Capital LLC, was the third largest shareholder of CARV, holding 153,438 shares (5% of total outstanding shares) as of June 3. However, amid rising interest from retail investors driving CARV shares, Lu sold off his entire stake, as disclosed on July 9. This move indicates a loss of confidence in the company from one its largest stakeholders. Nevertheless, the stock gained 23.6% intraday to hit its 52-week high of $42.50 on the same day.

Stakeholders liquidating their positions in CARV amid rising meme interest indicates bleak long-term growth prospects. Thus, CARV’s current share price gains are expected to be short-lived. In fact, CARV stock lost 18.1% intraday on July 12.

Stretched Valuation

In terms of trailing-12-month Price/Sales, CARV is currently trading at 4.08x, which is 23.5% higher than the 3.30x industry average. The stock’s 3.33 and 41.54 respective trailing-12-month Price/Book and Price/Cash Flow ratios compare with 1.21 and 9.21 industry averages.

POWR Ratings Reflect Bleak Prospects

CARV has an overall rating of D, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

CARV has a D grade for Stability, Value, and Quality. The stock’s premium valuation and 1.09 beta justify the Value and Stability grades, respectively. Also, CARV’s negative ROE and net income margin are in sync with the Quality grade.

Of the 70 stocks in the Northeast Regional Banks industry, CARV is ranked last.

Beyond what we’ve stated above, we have also rated CARV for Momentum, Growth, and Sentiment. Click here to access all CARV Ratings.

Click here to view the top-rated stocks in the Northeast Regional Banks industry.

Bottom Line

The continued near-zero interest environment has affected federal savings banks significantly , delivering low interest income. The industry headwinds, coupled with CARV’s weak fundamentals, makes it susceptible to a sharp pullback. Thus, we think the stock is best avoided now.

CARV shares were trading at $19.60 per share on Tuesday afternoon, down $2.10 (-9.68%). Year-to-date, CARV has gained 202.00%, versus a 17.62% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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