The past few months haven't been kind to stock investors. Nobody enjoys watching the value of their portfolio fall, and volatility can be rather scary.
However, volatile markets also tend to create some great bargains for long-term investors. Here's why it might be a good idea to add shares of Green Dot (GDOT 4.95%) and Axos Financial (AX 0.43%) while they're still beaten down as we start 2019.
Check out the latest Green Dot and Axos Financial earnings call transcripts.
Banking as a service could win the War on Cash
It's undeniable: We're gradually transitioning into a cashless society. It's becoming less and less convenient to use cash for everyday purchases, and some businesses have even started not accepting cash at all.
One of my favorite stocks for investing in the War on Cash is Green Dot. The company has two main parts of its business. It offers its own banking products, including its own brand-name prepaid debit cards that are readily found at thousands of retail locations, and GoBank bank accounts, which cater to people who cannot or don't want to open an account at a traditional bank.
In addition, and perhaps more exciting, Green Dot creates banking products for other companies, which it refers to as banking as a service, or BaaS.
In plain English, many companies can benefit from offering a person-to-person payment app or some sort of debit card product, but it's typically not desirable for a nonfinancial company to become a bank itself. For example, Green Dot's technology allows Uber drivers to get paid instantly after completing a drive, and it is the platform behind the Apple Pay Cash person-to-person payment platform.
Recent results have been impressive. In the third quarter of 2018 (the most recently reported as of this writing), Green Dot's revenue climbed by 14% year over year, and purchase volume on Green Dot's products grew by 13%.
Here's why I love Green Dot in particular in the current environment. The company's products -- especially its prepaid cards and nonconventional bank accounts -- are aimed at the subset of the population that is most likely to still be using cash for everyday purchases. Because of this, as the War on Cash rages on, Green Dot could benefit more than most fintech companies.
A rapidly growing bank trading at a sale price
Axos Financial is a smaller, online-based bank, which is better known to many people by its former name of BofI Holding, or "Bank of Internet." While the financial sector has significantly underperformed the market since mid-2018, Axos has done worse than most, down by 29% since May 2018 as compared with a drop of less than 6% for the overall sector.
Why the underperformance? Well, there are a few reasons. Expenses have risen significantly recently, efficiency has fallen, and since Axos pays higher-than-average rates on deposits, rising rates have caused the bank's interest expense to soar.
However, Axos' long-term growth story is still intact. The branchless business model allows Axos to operate a leaner and more profitable operation than most peers do. Axos' return on equity (ROE) of 15% and return on assets (ROA) of 1.57% are among the best in the business, and its net interest margin of 3.76%, while not quite as good as it was a year ago, is still roughly double what most of the big banks earn.
Speaking of "big banks" -- Axos is not one. Not yet, anyway. Axos has about $10 billion in assets. This is less than 1% of what some of the largest U.S. banks have and is why Axos' 14% annualized asset growth rate should be sustainable for years to come.