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Discover Financial Services (DFS) has been a darling for the market over the last several quarters. Between improving credit and the ability to return capital, the company at face value looks very solid.

Behind the curtain, however, are issues that raise concerns. So much so that Hedgeye Financials Sector Head Josh Steiner has immediately gone bearish on TRADE, TREND and TAIL durations. Steiner has effectively found four main issues with the company and the stock that make his case clear:

  • Peak earnings on what is now a peak multiple. When everything is going right, it’s usually not long before something goes wrong.
  • We see 18% downside just from mean reversion, and that incorporates no credit quality deterioration.
  • Volume slowdowns precede credit slowdowns. We’re seeing evidence on multiple fronts now that volume growth is decelerating.
  • Sentiment on DFS is uber-bullish. Not one sell rating among 26 analysts (19 buys / 7 holds) and short interest in its bottom quintile since coming public.

So while the banks and sellside analysts remain primarily bullish on DFS, Steiner continues to stand contrarian. It appears that the good times can only roll for so long before something goes wrong.

DFS:  TWIN PEAKS - DFS shortinterest.ng