Small-cap stocks have trailed the market this year, as the Russell 2000 is up by about 2% year to date (YTD), trailing the large-cap S&P 500, which has risen roughly 18%. The Russell 2000 Value Index has fared even worse, falling about 1% YTD.
While small-cap stocks are generally more volatile because they are often growing companies, they are not a monolith, and great deals are out there. One beaten-down small-cap stock that analysts seem to like is LendingClub (NYSE: LC). Is it a buy?
A volatile track record
LendingClub started out as a digital marketplace for peer-to-peer lending by consumers and businesses, but in 2021, it secured a bank charter by acquiring Radius Bank. Now LendingClub is an online neobank offering consumer and commercial loans and deposits, boasting lower rates and fees than its brick-and-mortar competitors due to lower overhead and administrative costs.
LendingClub stock has been extremely volatile over the years. In October 2021, the stock had surged to nearly $46 per share and finished the year up by about 128%. However, the fintech saw its value plummet in the 2022 bear market, and this year has brought more of the same, as it is now trading at around $5.60 per share.
This was just the latest bout of volatility for this stock. Its price surged to over $100 per share in 2015 after its initial public offering but then plummeted after a Justice Department investigation into its lending practices resulted in a civil penalty.
The past two years have been a difficult environment for banks with rising interest rates and the fallout from the deposit crisis this past spring. In the third quarter, LendingClub saw its revenue decline 34% year over year to $201 million and its net income fall 88% to $5 million.
Loan originations were down 57% year over year to $1.5 billion and off 25% from the second quarter of 2023, while total loans were up 15% year over year to $5.2 billion. Deposits also rose 37% year over year to $7 billion and are up 2% from the previous quarter.
In the fourth quarter, loan originations are expected to be in the range of $1.5 billion to $1.7 billion, so there is some positive momentum there. The company has also been saddled with high non-interest expenses, which have weighed on its earnings. However, it took a big step to get that under control in October, announcing plans to reduce its workforce by 14%, which should result in $30 million to $35 million in cost savings.
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Is LendingClub a buy?
The company is looking to get its financial house in order to take advantage of what CEO Scott Sanborn called a “historically large credit card debt-refinancing opportunity.” He is referring to the Federal Reserve’s expected unwinding of interest rate hikes as economic conditions improve.
Analysts are bullish on LendingClub, as it has a consensus buy rating and an average price target of $8 per share, which is 44% above its current price. The stock is relatively cheap, trading at 11 times earnings, but its price-to-earnings (P/E) ratio was just 3.8 on June 30 and 4 on Sept. 30, 2022, so it has climbed. Its forward P/E ratio is almost 25, up from 5 a year ago.
Over the longer term, LendingClub might be in a position to jump, but economic conditions may not change all that much, certainly in the first half of next year. There is also an increasing amount of competition in this space, and LendingClub has struggled to gain a foothold while being prone to tons of volatility over the years.
While there are some positive signs, I’d wait and watch this stock for a few more quarters before making any kind of move.
