3 Reasons to Sell NNI and 1 Stock to Buy Instead

Over the past six months, Nelnet’s shares (currently trading at $131.79) have posted a disappointing 6% loss, well below the S&P 500’s 7.7% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Nelnet, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Nelnet Not Exciting?

Even though the stock has become cheaper, we’re swiping left on Nelnet for now. Here are three reasons we avoid NNI, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

Over the last five years, Nelnet grew its revenue at a tepid 5.5% compounded annual growth rate. This wasn’t a great result compared to the rest of the financials sector, but there are still things to like about Nelnet.

2. Previous Growth Initiatives Haven’t Impressed

Return on equity, or ROE, quantifies financial firm profitability relative to shareholder equity — an essential capital source for these institutions. Over extended periods, superior ROE performance drives faster shareholder wealth compounding through reinvestment, share repurchases, and dividend growth.

Over the last five years, Nelnet has averaged an ROE of 8.4%, uninspiring for a company operating in a sector where the average shakes out around 10%.

3. High Debt Levels Increase Risk

Nelnet reported $830.5 million of cash and $7.7 billion of debt on its balance sheet in the most recent quarter.

As investors in high-quality companies, we primarily focus on whether a company’s profits can support its debt.

With $533 million of EBITDA over the last 12 months, we view Nelnet’s 12.9× net-debt-to-EBITDA ratio as inadequate. The company’s lacking profits relative to its borrowings give it little breathing room, raising red flags.

Final Judgment

Nelnet isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at $131.79 per share (or a forward price-to-sales ratio of 2.8×). The market typically values companies like Nelnet based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d recommend looking at one of our top digital advertising picks.

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