Interested in gaining exposure to financial companies? Do you prefer companies with strong profits, but that look undervalued? If so, here are some ideas to get you started on your search.
The forward P/E is a price multiple valuation metric, which is similar to the current P/E ratio, except that it uses the forecasted earnings instead. While this number might not be as accurate because it uses "forecasted" numbers, it does offer the benefit of illustrating analysts' expectations of a firm. If the market believes that earnings will grow moving forward, then the forward P/E should be lower than the current P/E. Financial Leverage, also known as the Equity Multiplier, illustrates how a firm is financing its assets. The lower the number the more a firm is financing its assets internally through stockholder equity. The higher this metric is the more the firm is relying on debt to finance its assets.
The Price/Earnings ratio is one of the most commonly used price-multiple metrics. Often, EPS from the last four quarters is used to derive this number. A firm that has a high P/E ratio generally indicates that investors have high expectations of the firm relative to future earnings growth. By the opposite token, investors generally have lower expectations of a firm with a low P/E ratio. A firm that holds a P/E below 10 could be viewed as having "value investment" potential. One thing to remember is that EPS is an accounting measure that could be potentially manipulated. Thus the P/E is only as good as the quality of the earnings.
The Net Margin is a profitability metric that illustrates, by percentage, how much of every dollar earned gets turned into a bottom line profit. This is just one of many profitability metrics used by investors and analysts to better understand what the company is being left with at the end of the day. Generally, a firm that can expand its net profit margins over a period of time will see its stock price rise as well due to the trend of increasing profitability. Net Margin = Net Income/Total Revenue
The Operating Profit Margin is a profitability ratio that measures the effectiveness of the company's operating efficiency. This metric allows investors to see how much profit is left after all variable costs are covered. If the company's margin is increasing over time this means that it's earning more per dollar of sales. Finding trends in the Operating Profit Margin helps investors identify companies that are improving profitability over time and managing the economic landscape better than competitors.
We first looked for financial stocks with a low price-multiple premium (forward P/E<10) and that are trading at a discount (P/E<10). From our screened list, we then looked for companies with strong profitability (Net Margin [TTM] >10%) and with strong profit margins (1-year operating margin>15%). We did not screen out any market caps.
Do you think these financial stocks will outperform? Use this list as a starting-off point for your own analysis.
1) Capstead Mortgage Corp. (CMO)
|Industry:||REIT - Diversified|
Capstead Mortgage Corp. has a Forward Price/Equity Ratio of 8.70 and Price/Earnings Ratio of 7.81 and Net Margin of 65.83% and Operating Profit Margin of 65.83%. The short interest was 4.12% as of 04/27/2012. Capstead Mortgage Corporation operates as a self-managed real estate investment trust. It invests in leveraged portfolio of residential mortgage pass-through securities consisting of adjustable-rate mortgage securities issued and guaranteed by government-sponsored enterprises or by an agency of the federal government. The company qualifies as a real estate investment trust for federal income tax purposes. It generally would not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its stockholders.
2) Anworth Mortgage Asset Corporation (ANH)
|Industry:||REIT - Diversified|
Anworth Mortgage Asset Corporation has a Forward Price/Equity Ratio of 7.92 and Price/Earnings Ratio of 7.39 and Net Margin of 54.81% and Operating Profit Margin of 54.81%. The short interest was 2.91% as of 04/27/2012. Anworth Mortgage Asset Corporation is a publicly owned real estate investment trust. The company invests in the fixed income and real estate markets of the United States. It primarily invests in United States agency mortgage-backed securities issued or guaranteed by United States government sponsored entities including mortgage pass-through certificates, collateralized mortgage obligations, and other real estate securities, on a leveraged basis.
3) Crexus Investment Corp. (CXS)
|Industry:||REIT - Diversified|
Crexus Investment Corp. has a Forward Price/Equity Ratio of 8.74 and Price/Earnings Ratio of 6.64 and Net Margin of 102.58% and Operating Profit Margin of 102.58%. The short interest was 1.93% as of 04/27/2012. CreXus Investment Corp., through its subsidiaries, operates as a commercial real estate company. It acquires, manages, and finances commercial mortgage loans and commercial real estate debts, commercial real properties, commercial mortgage-backed securities, other commercial real estate-related assets, and agency residential mortgage-backed securities. The company qualifies as a real estate investment trust for federal income tax purposes.
4) American Capital Agency Corp. (AGNC)
|Industry:||REIT - Residential|
American Capital Agency Corp. has a Forward Price/Equity Ratio of 6.45 and Price/Earnings Ratio of 5.92 and Net Margin of 69.48% and Operating Profit Margin of 70.04%. The short interest was 1.00% as of 04/27/2012. American Capital Agency Corp. operates as a real estate investment trust (REIT). It invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored entities or by the United States government agency. The company funds its investments primarily through short-term borrowings structured as repurchase agreements.
5) BofI Holding Inc. (BOFI)
|Industry:||Savings & Loans|
BofI Holding Inc. has a Forward Price/Equity Ratio of 6.47 and Price/Earnings Ratio of 8.51 and Net Margin of 29.84% and Operating Profit Margin of 49.78%. The short interest was 7.29% as of 04/27/2012. BofI Holding, Inc. operates as the holding company for BofI Federal Bank that provides various consumer and wholesale banking services primarily through the Internet in the United States. It accepts various deposit products, including demand deposit, savings, and certificates of deposit accounts. It also provides loan products, which consist of single family loans, home equity loans, multifamily loans, commercial real estate loans, recreational vehicle and automobile loans, and overdraft lines of credit.
* Company profiles were sourced from Finviz. Financial data was sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.