3 Overpriced Financial Stocks to Avoid

It is not much of a secret that I love financial stocks. My biggest sector exposure is community banks and I have a healthy dose of insurance companies purchased a few years back as well.

Hands and Dollars
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I have made more money in financial services stocks that in any other group over the years. Most of the time is easier to find financial stocks trading below book value than in industrial, technology or other sectors of the market.

It has been my experience that executives of small financials tend to own more shares of their company and are more frequent buyers of their own stock.

However, as with everything else, there is a time to buy and a time to sell, and some financial stocks are just too expensive to consider right now.

Erie Indemnity Company (NASDAQ:ERIE)

Erie Indemnity Company (NASDAQ:ERIE) is one of the best insurance companies in the business. The property and casualty insurance company has been investing in technology and developing new agencies and it has paid off over the best several years.

The company has been hurt by its conservative fixed income oriented investment policy but operationally it has exceeded expectations. However, all the good news is more than reflected in the price of the stock at current levels.

Erie shares are trading at 27 times earnings and 6.5 times book value and there is no way this company can grow fat enough to justify this valuation. The company will be lucky to grow the book value of the company by 5% annually over the next several years — nothing close enough to justify this premium valuation.

Charles Schwab Corp (NYSE:SCHW)

Charles Schwab (NYSE:SCHW) is another financial company that has also been doing very well the past few years. The company has delivered new products and services that have allowed it to recover in fine fashion from the financial crisis.

Indeed, 2015 looks to be another strong year for the company but this is more than reflected in the stock price. The stock is trading at 3.75 times book value and has a price-to-earnings ratio of 32 at the current price. I just do not see the company growing at a fast enough rate to justify the valuation.

Of course, if the stock market should suffer a sustained downturn it is highly likely that SCHW stock would lead the way lower as trading activity would quickly dry up.

Cohen & Steers, Inc. (NYSE:CNS)

Cohen & Steers, Inc. (NYSE:CNS) is an asset management firm that has seen strong tailwinds from the search for yield and Real Estate Investment Trust demand. The firm specializes in global real estate securities, global listed infrastructure, real assets, large cap value stocks, and preferred securities. All of these have been in demand as investors search for higher yielding investments to replace fixed income securities.

The company had a solid 2014 and should have a decent year in 2015 unless the market reveres course. Should REITs fallout of favor we would see asset outflows that could hurt the stock as well. However, I have a hard time seeing the company grow enough to justify the current 25 PE multiple and price-to-book value ratio of more than 8.

The future may look bright to Wall Street analysts, but it’s not without risks. And in the case of Cohen and Steers you are simply paying too much for the outlook.

As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/03/financial-stocks-overpriced/.

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