The Federal Reserve appears set to begin cutting interest rates in September. In fact, the cuts may be rather aggressive, with some traders starting to bet on 50 rather than 25 basis point cuts to try to support the job market.
At first glance, this might seem like good news for financial stocks. After all, the prior rapid increase in interest rates led to unfortunate side effects such as deposit flight and regional bank failures in 2023. So, reversing that could ease some tensions.
But interest rate cuts aren’t necessarily a panacea. The Fed is forced to action, it would seem, because unemployment is surging. In addition, a potential recession would likely lead to consumers struggling to pay their bills along with a dramatic slowdown in financial market activity. These three financial stocks to sell could be at the heart of the storm.
Dave (DAVE)
Financial technology, or “FinTech,” companies were all the rage a few years ago. Back in 2021, it seemed like app-based money and lending solutions could overwhelm the traditional banks.
While a few FinTech companies have managed to take off since then, most have not, for example, Dave (NASDAQ:DAVE). The app claims to be users’ “ultimate financial friend.” But its business model is anything but friendly.
Dave makes money, in large part, by offering people cash advances on their paychecks. In addition to charging a chunky fee for making this service, it also asks people for voluntary “tips” in return for the cash advances.
It suggests these tips will help fund providing healthy meals to charity, though Dave — the company — ends up with a huge chunk of these so-called tips.
The Consumer Financial Protection Bureau is proposing new regulation which would crack down on excessive fees on paycheck advance lending, putting Dave on the defensive.
In addition, prominent short-selling firm Bleecker Street Research slammed Dave saying the company is: “a predatory payday lender masquerading as a consumer-friendly fintech that protects its users from excessive overdraft charges.” Bleecker sees 70 to 100% downside for DAVE stock.
Upstart (UPST)
Upstart (NASDAQ:UPST) is another FinTech company that is likely to fall on hard times in the near future.
The company made a big deal of marketing its AI-powered lending algorithm, and its popularity took off back in 2021. But more recently, Upstart had to sharply curtail its lending as unfavorable market developments and skittish funding partners led to profound uncertainty.
Upstart’s revenues collapsed from $849 million in 2021 to just $514 million in 2023. Analysts expect another decrease for 2024.
The company is running large operating losses even as the business shrinks. And this was during a strong economic expansion with healthy consumer balance sheets.
It seems inevitable things will go from bad to worse once the recession hits. As if that weren’t enough, the SEC has subpoenaed Upstart with questions around its AI-lending model.
Piper Sandler (PIPR)
Founded in 1895, Piper Sandler (NYSE:PIPR) is a growing investment bank. With the consolidation in the investment banking space since the 2008 financial crisis and resulting regulatory crackdown on financial institutions, opportunities have emerged for smaller players like Piper Sandler.
In fact, Piper Sandler grew its revenues from $741 million in 2018 to a peak of $2 billion in 2021.
That shows the power of a growing investment bank in dynamic capital market conditions such as the SPAC and technology boom that occurred during the early days of the pandemic.
Since the 2021 peak, however, Piper Sandler’s revenues slumped as deal-making lost steam. Even with the recent surge in financial market activity, Piper Sandler’s revenues were just $1.4 billion over the past 12 months, leaving it 30% short of prior highs.
By contrast, PIPR stock recently hit a peak of $280 per share, whereas the stock topped out at $180 back in 2021.
Clearly, investors have been paying up for the bank’s potential rather than its actual results this year. But with financial markets now entering a tailspin, it’s time to greatly revise those estimates downward. I expect PIPR stock to fall well under $200 in coming months.
On the date of publication, Ian Bezek 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.