NOTGold Trust (NTRS) is a Chicago-based financial services company. The company offers a range of buy-side investments and banking services. I am neutral on the title.
Negligible debt portfolio
Due to rising yields, many investors are currently choosing to invest in financial services stocks. However, it must be taken into account that the positive effects of the environment of increased returns will be exclusive to stocks in the financial sector with high exposure to the debt markets.
With only 21% of Northern Trust’s income coming from interest-bearing activities, I don’t see how it will benefit from the debt market. I think Northern Trust is about to face uncertain times with its pay-to-buy model. Stock market volumes are expected to calm down soon, meaning fewer wealthy investors will seek to have their capital invested in Northern Trust.
The company’s stock is significantly overvalued relative to the sector. Northern Trusts price-to-earnings and price-to-sell ratios are trading at premiums of 73% and 22%, respectively. Moreover, according to its PEG ratio, the stock price is trading at 3.9 times current earnings growth.
Stocks in the financial sector have gained momentum recently, but Northern Trust has lagged the market. The stock is currently trading below its 10- and 50-day moving averages while failing to break out of the RSI 40-50 range.
I don’t see any upcoming catalyst for a change in direction for the price of this stock. Therefore, I think investors would do well to divest the stock from their portfolios, especially considering its beta of 1.15, which outweighs market risk.
Dividend capacity reached
An alternative to seeking capital gains would be dividend income. However, Northern Trusts’ dividend capacity is absent. The company is currently paying a cash dividend premium of 75% over its five-year average. Additionally, cash flow from operations is not expected to benefit from the rising yield environment, as mentioned.
The Taking of Wall Street
On Wall Street, Northern Trust has a moderate buy consensus rating, based on six buys, five holds and two sells assigned over the past eleven months. Northern Trust’s average price target of $132.25 implies 17.5% upside potential.
Due to current market sentiment, many investors will be looking for financial services stocks to invest in now. However, Northern Trust is not your best option as it has an insignificant loan book and overvalued stock.
Disclosure: At the time of publication, Steve Gray Booyens had no position on any of the stocks mentioned in this article.
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