Financial firms serve as the backbone of the economy, providing essential services from lending and investment management to risk management and payment processing. But worries about economic uncertainty and potential market volatility have kept sentiment in check, and over the past six months, the industry has tumbled by 12.2%. This drawdown was worse than the S&P 500’s 3.2% fall.

A cautious approach is imperative when dabbling in financials as many are sensitive to economic cycles and regulatory changes. On that note, here are three financials stocks we’re steering clear of.

BNY (BK)

Market Cap: $78.91 billion

Tracing its roots back to 1784 when it was founded by Alexander Hamilton, BNY (NYSE: BK) is a global financial institution that provides asset servicing, wealth management, and investment services to institutions, corporations, and high-net-worth individuals.

Why Does BK Give Us Pause?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 4.7% over the last five years was below our standards for the financials sector
2. Sizable asset base leads to capital growth challenges as its 3.2% annual tangible book value per share increases over the last five years fell short of other financials companies
3. Below-average return on equity indicates management struggled to find compelling investment opportunities

BNY’s stock price of $114.53 implies a valuation ratio of 14x forward P/E. If you’re considering BK for your portfolio, see our FREE research report to learn more.

Morgan Stanley (MS)

Market Cap: $251.5 billion

Founded in 1924 during the post-WWI economic boom by former JP Morgan partners, Morgan Stanley (NYSE: MS) is a global financial services firm that provides investment banking, wealth management, and investment management services to corporations, governments, institutions, and individuals.

Why Does MS Fall Short?

1. Earnings per share lagged its peers over the last five years as they only grew by 9.3% annually
2. Large asset base makes it harder to grow tangible book value per share quickly, and its annual tangible book value per share growth of 3.6% over the last five years was below our standards for the financials sector

At $158.68 per share, Morgan Stanley trades at 14.3x forward P/E. To fully understand why you should be careful with MS, check out our full research report (it’s free).

Nelnet (NNI)

Market Cap: $4.54 billion

Starting as a student loan servicer in the 1970s and evolving through the changing landscape of education finance, Nelnet (NYSE: NNI) provides student loan servicing, education technology, payment processing, and banking services while managing a portfolio of education loans.

Why Are We Hesitant About NNI?

1. Incremental sales over the last five years were less profitable as its 4.3% annual earnings per share growth lagged its revenue gains
2. Underwhelming 9% return on equity reflects management’s difficulties in finding profitable growth opportunities

Nelnet is trading at $126.78 per share, or 14x forward P/E. Check out our free in-depth research report to learn more about why NNI doesn’t pass our bar.

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