Normally investors are advised to “buy the rumor, sell the news.” However, there are times when buying the news can be a smart play. A good example is emerging as it relates to high-potential stocks in the financial technology (fintech sector).
As part of the Fiscal Responsibility Act that put an end to the debt ceiling debate through at least 2024, the student loan moratorium which began in 2020 will come to an end beginning in October. This could have wide-ranging effects on the broader economy. However, it’s also likely to create opportunities for nimble investors.
Many of these fintech companies burst onto the scene as a solution for students in need of loans. However, many of these companies have been treading water for several years as a major source of revenue is largely being withheld.
But with many customers now on the hook to restart student loan payments, the stage is set for these companies to deliver strong performance in the last quarter of the year. This gives opportunistic investors a chance to buy these fintech stocks.
SoFi Technologies (SOFI)
At first glance, SoFi Technologies (NASDAQ:SOFI) may look overvalued. SOFI stock has climbed over 45% in the last year. But looks can be deceiving. Until the middle of May 2023, SOFI stock was down approximately 20%. The resumption of student loan payments is the obvious catalyst. Prior to the moratorium, the company generated approximately half of its revenue from student loans.
The reaction from analysts, however, has been largely negative. In June alone at least three analysts have downgraded the stock. An additional analyst from Compass Point initiated coverage with a rare Sell rating on SOFI stock.
At issue is the company’s business model. Many analysts claim that now that it has its bank charter, SoFi is a bank. If that’s the case, then the sentiment is that SOFI stock is overvalued. The other side of that argument says that SoFi provides a single, cloud-native digital source for financial services. And it’s targeting a generation of consumers who are not only comfortable with, but expect, digital solutions for nearly everything in their life.
LendingClub (LC)
Next on this list of high-potential stocks that will benefit from student loan repayments is LendingClub (NYSE:LC). The company isn’t a provider of student loans per se, but the company allows qualified buyers to get an unsecured personal loan of up to $40,000 for virtually any reason.
Despite a rising interest rate environment, many students may be able to refinance their student loans. And this may be critical as many of these individuals may be sitting on a hefty amount of credit card debt they’ve been building up over the past two years.
If that plays out, it could reverse a trend that is showing both revenue and earnings growth declining on a year-over-year (YOY) basis. That’s what analysts seem to be counting on. They are forecasting earnings growth of over 166% for the year. And consensus targets show a 40% upside for LC stock from its level as of this writing.
Upstart (UPST)
Of the three high-potential stocks on this list Upstart (NASDAQ:UPST) may carry the most risk. That’s because it’s the only company on this list that doesn’t offer banking services. The entirety of its revenue comes from lending.
However, one attribute that Upstart shares with all the companies on this list is the use of AI. In fact, Upstart is known for using a highly refined AI program to help fine-tune its lending standards and help reduce loan defaults.
Like LendingClub, Upstart may benefit as borrowers look for options to refinance their student loans. The company and its stock had a rough time in 2022. And the first quarter of 2023 wasn’t much better, although it did beat revenue and earnings expectations for the second consecutive quarter. With that in mind, analysts believe that the bottom may be in.
That being said, at the time of this article, UPST stock is trading for $33.28 per share. That looks like a rich valuation. But investors should look for a pullback as an opportunity to buy the stock.
On the date of publication, Chris Markoch 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.