Provident Financial Services, Inc. PFS

The stocks in this article have caught Wall Street’s attention in a big way, with price targets implying returns above 20%. But investors should take these forecasts with a grain of salt because analysts typically say nice things about companies so their firms can win business in other product lines like M&A advisory.

Provident Financial Services has delivered a share price gain of 74.5% over the past 3 years, which puts fresh attention on what investors are really paying for. The core issue is whether that move is supported by the returns the bank earns on the capital it deploys. The 74.5% return over 3 years puts meaningful weight on the question of whether Provident Financial Services is recycling its equity into high enough returns to justify today's valuation. The business depends on how effectively...