Over the past six months, Flagstar Financial’s shares (currently trading at $11.56) have posted a disappointing 10.5% loss, well below the S&P 500’s 5.3% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Flagstar Financial, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Flagstar Financial Will Underperform?

Even though the stock has become cheaper, we don't have much confidence in Flagstar Financial. Here are three reasons why we avoid FLG and a stock we'd rather own.

1. Revenue Tumbling Downwards

Long-term growth is the most important, but within financials, a stretched historical view may miss recent interest rate changes and market returns. Flagstar Financial’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 9.3% over the last two years. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Flagstar Financial, its EPS declined by 21% annually over the last five years while its revenue grew by 16%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Declining TBVPS Reflects Erosion of Asset Value

We consider tangible book value per share (TBVPS) the most important metric to track for banks. TBVPS represents the real, liquid net worth per share of a bank, excluding intangible assets that have debatable value upon liquidation.

Disappointingly for investors, Flagstar Financial’s TBVPS continued freefalling over the past two years as TBVPS declined at a -25.3% annual clip (from $30.87 to $17.25 per share).

Final Judgment

Flagstar Financial doesn’t pass our quality test. After the recent drawdown, the stock trades at 0.7× forward P/B (or $11.56 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.

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