Financial stocks can be risky investments, depending on the company's management. One way to hone in on well managed companies is to look for those companies that not only have strong track records of profitability, but ones that industry analysts also favor highly. We ran a screen with these ideas in mind, and we came up with a pretty interesting list.
Return on Equity [ROE] is one way to identify great potential names relative to profitability. This ratio illustrates the percentage return on shareholder equity. As well, this metric segments the company into operational efficiency, asset use efficiency, and financial leverage. Why does this matter? Simply put, it allows investors to get a real picture of how the company is generating these returns and helps identify parts of the company that may be underperforming.
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. Next, we then screened for businesses that have been able to maintain a sound level of profitability for shareholders (ROE [TTM]>30%)(1-year operating margin>15%). Next, we then screened for businesses that analysts rate as "Buy" (2 < mean recommendation < 3). We did not screen out any market caps.
Do you think these stocks have strong operations? Use this list as a starting-off point for your own analysis.
1) Waddell & Reed Financial Inc. (WDR)
Waddell & Reed Financial Inc. has a Return on Equity of 33.29%, a Operating Profit Margin of 24.06%, and a Analysts' Rating of 2.40. The short interest was 3.45% as of 06/16/2012. Waddell & Reed Financial, Inc., through its subsidiaries, provides investment management, investment product underwriting and distribution, and shareholder services administration to mutual funds, and institutional and separately managed accounts in the United States. The company acts as an investment adviser for institutional and other private investors, and provides sub advisory services to other investment companies; underwrites and distributes registered open-end mutual fund portfolios; distributes business partners' variable annuity products, and retirement and life insurance products to advisors channel customers; sells life insurance and disability products underwritten by various carriers; and offers fee-based asset allocation investment advisory products to advisors channel customers. It distributes investment products through independent financial advisors, broker/dealers, registered investment advisors, and various retirement platforms; and markets investment advisory services to institutional investors directly or through consultants.
2) Mesabi Trust (MSB)
Mesabi Trust has a Return on Equity of 966.17%, a Operating Profit Margin of 97.02%, and a Analysts' Rating of 2.00. The short interest was 4.28% as of 06/16/2012. Mesabi Trust operates as a royalty trust in the United States. The company produces iron ore pellets. It holds interests the Peter Mitchell mine located at the eastern end of the Mesabi Iron Range, near Babbitt, Minnesota.
3) Discover Financial Services (DFS)
Discover Financial Services has a Return on Equity of 30.10%, a Operating Profit Margin of 53.03%, and a Analysts' Rating of 1.90. The short interest was 1.00% as of 06/16/2012. Discover Financial Services, a bank holding company, offers direct banking and payment services in the United States. It operates in two segments, Direct Banking and Payment Services. The Direct Banking segment offers Discover card-branded credit cards to individuals and small businesses that are accepted on the Discover Network.
4) Newcastle Investment Corp. (NCT)
|Industry:||REIT - Diversified|
Newcastle Investment Corp. has a Return on Equity of 157.29%, a Operating Profit Margin of 60.42%, and a Analysts' Rating of 1.60. The short interest was 4.01% as of 06/16/2012. Newcastle Investment Corp. operates as a real estate investment and finance company that invests in and manages a portfolio consisting primarily of real estate securities. The company's portfolio of real estate securities includes commercial mortgage backed securities, senior unsecured debt issued by property REITs, real estate related asset backed securities, and agency residential mortgage backed securities. Newcastle also owns interest in loans and pools of loans, including real estate related loans, commercial mortgage loans, residential mortgage loans, and manufactured housing loans.
*Company profiles were sourced from Finviz. Financial data was sourced from Finviz.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.