3 Reasons WAFD is Risky and 1 Stock to Buy Instead

Investors looking for hidden gems should keep an eye on small-cap stocks because they’re frequently overlooked by Wall Street. Many opportunities exist in this part of the market, but it is also a high-risk, high-reward environment due to the lack of reliable analyst price targets.

Luckily for you, our mission at StockStory is to help you make money and avoid losses by sorting the winners from the losers. Keeping that in mind, here are three small-cap stocks to avoid and some other investments you should consider instead.

Cathay General Bancorp (CATY)

Market Cap: $3.45 billion

Founded in 1962 with its first branch in Los Angeles' Chinatown, Cathay General Bancorp operates Cathay Bank, providing commercial banking services to businesses and individuals with a strong presence in Asian-American communities.

Why Do We Think Twice About CATY?

• Sales tumbled by 4.4% annually over the last two years, showing market trends are working against its favor during this cycle
• Muted 5.4% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
• Net interest margin shrank by 48.3 basis points (100 basis points = 1 percentage point) over the last two years, suggesting the profitability of its loan book is decreasing or the market is becoming more competitive

Cathay General Bancorp is trading at $49.91 per share, or 1.2x forward P/B. Dive into our free research report to see why there are better opportunities than CATY.

Hercules Capital (HTGC)

Market Cap: $3.50 billion

Named after the mythological hero known for his strength, Hercules Capital is a business development company that provides debt financing to venture capital-backed and growth-stage technology and life sciences companies.

Why Does HTGC Give Us Pause?

• Annual earnings per share growth of 2.1% underperformed its revenue over the last two years, showing its incremental sales were less profitable

Hercules Capital’s stock price of $19.53 implies a valuation ratio of 9.7x forward P/E. Check out our free in-depth research report to learn more about why HTGC doesn’t pass our bar.

WaFd Bank (WAFD)

Market Cap: $2.48 billion

Founded in 1917 and rebranded from Washington Federal in 2023, WaFd is a bank holding company that provides lending, deposit services, and insurance through its Washington Federal Bank subsidiary across eight western states.

Why Are We Wary of WAFD?

• Net interest income trends were unexciting over the last five years as its 7% annual growth was below the typical banking firm
• 102.2 basis point (100 basis points = 1 percentage point) decline in its net interest margin over the last two years reflects the firm’s willingness to accept lower profitability to defend its market position
• Sales were less profitable over the last two years as its earnings per share fell by 18.8% annually, worse than its revenue declines

At $31.45 per share, WaFd Bank trades at 0.9x forward P/B. Read our free research report to see why you should think twice about including WAFD in your portfolio.

Stocks We Like More

When Trump unveiled his aggressive tariff plan in April 2025, markets tanked as investors feared a full-blown trade war. But those who panicked and sold missed the subsequent rebound that’s already erased most losses.

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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return).

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Quarterly earnings results are a good time to check in on a company’s progress, especially compared to its peers in the same sector. Today we are looking at WaFd Bank and the best and worst performers in the thrifts & mortgage finance industry.

Thrifts & Mortgage Finance institutions operate by accepting deposits and extending loans primarily for residential mortgages, earning revenue through interest rate spreads (difference between lending rates and borrowing costs) and origination fees. The industry benefits from demographic tailwinds as millennials enter prime homebuying age, technological advancements streamlining the loan approval process, and potential interest rate stabilization improving affordability. However, significant headwinds include net interest margin compression during rate volatility, increased competition from fintech disruptors offering digital-first experiences, mounting regulatory compliance costs, and potential housing market corrections that could impact loan portfolios and default rates.

The 18 thrifts & mortgage finance stocks we track reported a slower Q2. As a group, revenues missed analysts’ consensus estimates by 29.8% while next quarter’s revenue guidance was in line.

In light of this news, share prices of the companies have held steady as they are up 3.6% on average since the latest earnings results.

WaFd Bank

Founded in 1917 and rebranded from Washington Federal in 2023, WaFd is a bank holding company that provides lending, deposit services, and insurance through its Washington Federal Bank subsidiary across eight western states.

WaFd Bank reported revenues of $186.3 million, down 4.2% year on year. This print exceeded analysts’ expectations by 1.8%. Overall, it was a strong quarter for the company with a beat of analysts’ EPS estimates and a narrow beat of analysts’ net interest income estimates.

Interestingly, the stock is up 3.2% since reporting and currently trades at $30.67.

Is now the time to buy WaFd Bank? Access our full analysis of the earnings results here, it’s free.

Best Q2: Ellington Financial

Operating under the guidance of Ellington Management Group, a respected name in structured credit markets, Ellington Financial acquires and manages a diverse portfolio of mortgage-related, consumer-related, and other financial assets to generate returns for investors.

Ellington Financial reported revenues of $92.54 million, up 1.5% year on year, outperforming analysts’ expectations by 11.5%. The business had a stunning quarter with a solid beat of analysts’ tangible book value per share estimates and a beat of analysts’ EPS estimates.

The market seems happy with the results as the stock is up 9.6% since reporting. It currently trades at $13.88.

Is now the time to buy Ellington Financial? Access our full analysis of the earnings results here, it’s free.

Weakest Q2: Ready Capital

Operating as one of only 17 non-bank Small Business Lending Companies with preferred lender status from the SBA, Ready Capital is a multi-strategy real estate finance company that originates, acquires, and services commercial real estate loans, small business loans, and other real estate investments.

Ready Capital reported revenues of -$26.37 million, up 29.4% year on year, falling short of analysts’ expectations by 155%. It was a disappointing quarter as it posted a significant miss of analysts’ tangible book value per share estimates and a significant miss of analysts’ net interest income estimates.

Ready Capital delivered the weakest performance against analyst estimates in the group. As expected, the stock is down 8.6% since the results and currently trades at $3.88.

Read our full analysis of Ready Capital’s results here.

Walker & Dunlop

Originating as a small mortgage banking firm during the Great Depression in 1937, Walker & Dunlop provides commercial real estate financing, property sales, appraisal, and investment management services with a focus on multifamily properties.

Walker & Dunlop reported revenues of $319.2 million, up 17.9% year on year. This result beat analysts’ expectations by 17.1%. Overall, it was an exceptional quarter as it also recorded a solid beat of analysts’ net interest income estimates and a beat of analysts’ EPS estimates.

Walker & Dunlop pulled off the biggest analyst estimates beat among its peers. The stock is up 11.7% since reporting and currently trades at $84.28.

Read our full, actionable report on Walker & Dunlop here, it’s free.

Starwood Property Trust

With a diverse portfolio spanning commercial properties, residential mortgages, infrastructure loans, and real estate servicing, Starwood Property Trust is a real estate investment trust that originates, acquires, and manages commercial mortgages, residential loans, and other real estate investments.

Starwood Property Trust reported revenues of $165.5 million, down 11.2% year on year. This number lagged analysts' expectations by 20.4%. Overall, it was a softer quarter as it also recorded a significant miss of analysts’ net interest income estimates.

The stock is up 2.8% since reporting and currently trades at $19.97.

Read our full, actionable report on Starwood Property Trust here, it’s free.

Market Update

Thanks to the Fed’s rate hikes in 2022 and 2023, inflation has been on a steady path downward, easing back toward that 2% sweet spot. Fortunately (miraculously to some), all this tightening didn’t send the economy tumbling into a recession, so here we are, cautiously celebrating a soft landing. The cherry on top? Recent rate cuts (half a point in September 2024, a quarter in November) have propped up markets, especially after Trump’s November win lit a fire under major indices and sent them to all-time highs. However, there’s still plenty to ponder — tariffs, corporate tax cuts, and what 2025 might hold for the economy.