Why These 3 Stocks Are the Worst Ways to Play Banks Right Now

Josh Enomoto

July 13, 2023 4 min read

PACW
IROQ

Few personality traits are as insufferable as dwelling on past errors, which may be how some folks perceive the worst bank stocks. Earlier this year, the regional banking sector suffered a crisis as post-pandemic developments suddenly converted to massive headwinds. Practically out of nowhere, bank runs – a concept found in history books or in less-developed nations – briefly materialized. Still, America appears to have moved on.

So, bringing up the topic of bank stocks to avoid might seem like overkill at the moment. However, it’s important to realize that just a few months ago, several experts stated that the regional bank crisis wasn’t over yet. With stresses still evident at the time, it’s doubtful that several weeks later, the situation has been resolved.

What I’m saying here is that it only takes one negative catalyst to unravel prior good works. Therefore, investors should keep a close eye on high-risk bank stocks. Finally, with the Federal Reserve still likely to raise interest rates, this action may have significant consequences for the economy. Therefore, we’re still not done talking about poor performing bank stocks.

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NewtekOne (NEWT)

Figurines of two little men in suits looking at downward stock arrow going through the floor

Source: shutterstock.com/Black Salmon

An internally managed business development company, NewtekOne (NASDAQ:NEWT) also features several controlled portfolio companies. With its broad range of business and financial solutions under the Newtek brand – including NewtekAdvantage and NewtekBank – the company caters to the small-and-medium-sized business market. Some of its specific services include business lending, electronic payment processing and accounts receivable financing.

While relevant in perhaps most other contexts, under the current paradigm, NewtekOne ranks among the worst bank stocks to avoid. Fundamentally, with the latest June jobs report still presenting matters that the Fed must address – such as wage growth and declining unemployment – rate hikes aren’t out of the question. If so, the economy might suffer a downcycle, which probably won’t benefit financially challenged BDCs.

And that’s exactly what NewtekOne is – financially challenged. According to investment data aggregator Gurufocus, NEWT suffers from five red flags. Among the warning signs stand poor financial strength, declining revenue per share and heavy operational inefficiencies. Unfortunately, the objective data indicates that NEWT ranks among the unstable bank stocks.

IF Bancorp (IROQ)

Source: Shutterstock

A bank holding company, IF Bancorp (NASDAQ:IROQ) features a subsidiary which operates as a federally chartered savings association. It provides financial services primarily to individuals, families and businesses that include deposit accounts, loans and property and casualty insurance. Unfortunately, IROQ just hasn’t garnered traction with investors, particularly following the regional banking crisis. Since the January opener, shares fell nearly 18%.

Against the trailing one-year period, IROQ gave up almost 25% of market value, qualifying it as one of the worst bank stocks to avoid. To be fair, the red ink makes IF appear undervalued. For example, shares trade at a trailing revenue multiple of 1.75, whereas the sector median stat stands at 2.18X.

However, in the first quarter of 2023, the enterprise posted sales of $5.98 million, down more than 12% on a year-over-year basis. Thus, some questions exist as to whether IROQ is a discount or a value trap. Gurufocus goes with the latter, making it one of the high-risk bank stocks.

PacWest Bancorp (PACW)

a frustrated man with a white board behind him that features a black downward arrow

Source: Shutterstock

One of the hardest hit entities in the banking sector, PacWest Bancorp (NASDAQ:PACW) easily holds the dubious honor as a “top line” candidate for worst bank stocks. Prior to the sector crisis, PacWest boasted of holding over $29 billion in assets. Commanding a significant presence in California, the enterprise theoretically should benefit from the underlying economic engine. Sadly, that didn’t save PACW from free falling more than 63% since the January opener.

In the past one-year period, shares slipped nearly 69% while over the trailing five years, they cratered more than 83%. While I don’t want to kick an entity while it’s down, it’s difficult to justify encouraging passersby to acquire shares of poor performing bank stocks.

Similar to IF Bancorp above, PACW appears undervalued, trading at a sales multiple of only 0.77X. However, in Q1 2023, PacWest posted revenue of $285 million, down almost 9% YOY. Therefore, Gurufocus warns its readers that it may be a value trap. Plus, with a massive hit to net margins and a Piotroski F-Score of 2 out of 9 indicating operational inefficiency, PACW is one of the high-risk bank stocks to avoid.

On the date of publication, Josh Enomoto 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.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.