Synchrony Financial (SYF Quick QuoteSYF - Free Report) is a premier consumer financial services company in the United States that offers a wide range of credit products. The company has been investing in numerous technological upgrades of its products and services in order to stay digitally updated. Despite this, it suffers from a number of headwinds like rising expenses, increasing allowance for loan losses and rising fraud-related loss. All these headwinds led to an unfavorable share price movement for the company as well.

Let’s have a look at why it would be a wise decision to drop the stock from your portfolio now:

Unfavorable Share Price Movement

Over last one year, the stock has lost 11.7%, where as the Zacks categorized Financial Miscellaneous Services industry gained 11.7%.  As discussed above, the headwinds faced by the company might have affected shareholders’ trust in the stock.

Rising Level of Expenses

The company’s rising expenses since 2013 have been a major area of concern. Total other expenses jumped at a three-year CAGR (2013–16) of 12.3%. In the first quarter of 2017, total other expenses increased 13.5% to $908 million from the prior-year quarter. Synchrony Financial’s several organic and inorganic strategies resulted in higher marketing expenses and acquisitions-related costs. Robust investments in digitization also led to a rise in expenditures.

Increasing Allowance for Loan Losses

Synchrony Financial’s allowance for loan losses has been rising on the back of continuous growth in its loan portfolio since 2013. Also, during the first quarter of 2017, the metric grew 29.2% year over year. Despite improving credit metrics, the company expects an increase in its allowance for loan losses at an interim period end compared to the prior-year end, reflecting seasonal trends.

Rising Fraud-Related Loss

Synchrony Financial’s exposure to risks of fraudulent activity associated with partners, customers and third parties handling customer information raises concern. Since 2014, fraud-related losses have been increasing. Although it somewhat stabilized in 2016 with the implementation of the EMV chip in Dual Cards and general purpose co-branded credit cards, the company’s nature of operation keeps it exposed to such losses.

Overvaluation & Downward Estimate Revisions

The stock seems overvalued as its Price to Cash flow ratio is 3.13, slightly higher than the industry average of 3.00. In last 60 days, the current-quarter estimates for the Zacks Rank #5 (Strong Sell) stock declined 22% in last two months due to seven downward movements against no upward movement. The current-year estimates also dropped 13.5% due to nine downward movements against no upward movement.

Stocks to Consider

Investors interested in the industry can consider stocks like Moody's Corporation (MCO Quick QuoteMCO - Free Report) , American Financial Group, Inc. (AFG Quick QuoteAFG - Free Report) and Aflac Incorporated (AFL Quick QuoteAFL - Free Report) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

Moody's delivered positive surprises in each of the last four quarters with an average beat of 11.72%.

American Financial Group’s earnings beat estimates in three of the last four quarters with an average positive surprise of 11.47%.

Aflac delivered positive surprises in three of the last four quarters with an average beat of 0.85%.

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