According to credit rating agency Fitch Ratings, the financial sector is expected to benefit from an improving operating environment. However, the agency also expects a deterioration of loan asset quality as fiscal and policy support fades for banks and non-bank financial institutions (NBFI).

Furthermore, according to a non-profit organization, the Jubilee Debt Campaign, the Federal Reserve’s and other central banks’ aggressive rate hikes are likely to worsen the global debt crisis, which is expected to impact the global economic recovery from the pandemic. In addition, CFP Douglas Boneparth, president of Bone Fide Wealth in New York, cautioned that during interest rate hikes, “Financial services are generally attractive, but there’s danger in always saying this will happen.”

Given this backdrop, we think these fundamentally weak financial stocks–Grab Holdings Limited (GRAB), Affirm Holdings, Inc. (AFRM), and Paysafe Limited (PSFE)–might be best avoided. These stocks look overvalued at their current price levels.

Grab Holdings Limited (GRAB)

Singapore-based GRAB is a transportation and fintech platform that operates in Southeast Asia. The company offers a range of services, including mobility, food, package, grocery delivery services, and financial services. GRAB began trading on December 2, 2021, after a business combination with Altimeter Growth Corp.

In terms of its forward EV/Sales, GRAB is currently trading at 39.31x, which is 2,957.4% higher than the 1.29x industry average. Furthermore, the stock’s 27.06 forward Price/Sales multiple is currently trading 2,395.7% higher than the 1.08 industry average.

For its fiscal third quarter, ended September 30, GRAB’s revenue decreased 8.7% year-over-year to $157 million. Its loss for the period rose 59.1% from the prior-year quarter to $988 million, while its adjusted EBITDA came in at a negative $212 million, down 65.6% from the same period the prior year.

The Street expects GRAB’s EPS to come in at negative $0.23 for the fiscal year 2022.

The stock has declined 39.2% in price since it started trading on December 2 to close Friday’s trading session at $5.32. It has declined 6% over the past five days.

GRAB’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

GRAB has an F Quality grade and a Value grade of D. In the 13-stock Foreign Consumer Finance industry, it is ranked last. Click here to see the additional POWR Ratings for GRAB (Growth, Momentum, Stability, and Sentiment).

Affirm Holdings, Inc. (AFRM)

AFRM is a San Francisco-based digital and mobile-first commerce platform. Its offerings include point-of-sale payment solutions for its customers and merchant commerce solutions.

On December 28, law firm Block & Leviton announced it was investigating AFRM for alleged securities rights violations. The investigation centers on a  December 16 Consumer Financial Protection Bureau order that sought information about the company’s facilitation of excessive consumer debt, regulatory arbitrage, and data harvesting. AFRM is under several other law firms’ investigations.

AFRM’s 14.42 forward EV/Sales multiple is currently trading 284.8% higher than the 3.75 industry average. In terms of its forward Price/Sales, the stock is currently trading at 13.81x, which is 274.4% higher than the 3.69x industry average.

In the fiscal first quarter, ended September 30, AFRM’s net loss increased 7,670.3% year-over-year to $306.62 million, while its net loss per share rose 1,783.3% from the prior-year quarter to $1.13. Its adjusted operating loss was $45.09 million, up 469.4% from the prior-year quarter.

Analysts expect AFRM’s EPS to remain negative until fiscal 2023. In addition, the company has missed consensus EPS estimates in three of the trailing four quarters.

Over the past year, the stock has declined 39.3% in price to close Friday’s trading session at $62.75. It has declined 22.6% over the past month.

It is no surprise that AFRM has an overall F rating, which translates to a Strong Sell in our POWR Rating system. AFRM has a Stability grade of F and a Value, Sentiment, and Quality grade of D. In the 82-stock Technology – Services industry, it is ranked #80. This industry is rated D. Click here to see the additional POWR Ratings for AFRM (Growth and Momentum).

Paysafe Limited (PSFE)

PSFE, based in Hamilton, Bermuda, operates as a provider of digital commerce solutions to online businesses, SMB merchants, and consumers through its worldwide network. The company provides digital wallet solutions under the Skrill and NETELLER brands.

On December 31, law firm Bernstein Liebhard LLP announced the filing of a class-action lawsuit against PSFE. According to the complaint, PSFE allegedly failed to disclose that the company was negatively impacted by gambling regulations in key European markets, was facing performance challenges in its Digital Wallet segment, and its new e-commerce agreements were being pushed back. On November 11, the company revised its revenue guidance from a range of $1.53 million to $1.55 million to $1.47 to $1.48 million, which caused its share price to slide by $3.03 per share. PSFE is also under investigation by several other law firms.

In terms of its trailing 12 months EV/EBIT, PSFE is currently trading at 65.29x, which is 174% higher than the 23.82 industry average.

PSFE’s revenue decreased 0.5% year-over-year to $353.59 million in its fiscal third quarter, ended September 30. Its operating and net loss stood at $301.18 million and $147.11 million, respectively, registering increases of 7,692.6% and 280.9% from the prior-year period.

The $362.73 million consensus revenue estimate for the quarter ending March 2022 indicates a 3.9% year-over-year decrease.

Over the past six months, the stock has declined 68.3% in price to close Friday’s trading session at $3.44. It has declined 53.7% over the past three months.

PSFE’s poor prospects are reflected in its POWR Ratings. The stock has an overall D rating, which equates to Sell in our proprietary rating system. PSFE has an F grade for Stability and a D grade for Quality. Within the 53-stock, D-rated Consumer Financial Services industry, it is ranked #50.

In addition to the POWR Rating grades we have stated above, one can see PSFE ratings for Growth, Value, Momentum, and Sentiment here.

GRAB shares were trading at $5.35 per share on Monday afternoon, up $0.03 (+0.56%). Year-to-date, GRAB has declined -24.96%, versus a -5.23% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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