Though many investors are rightfully wary of investing in the financial sector, there are still some companies that are well run and worthy of a second look. One way to reduce risk is to concentrate on those that have maintained profitability during market fluctuations. Our list today identifies financial stocks that have produced solid profits and also appear to be trading at a discount when measured against growth in earnings. We think you may be inspired to do additional research.
The PEG ratio (price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share [EPS], and the company's expected growth. In general, the P/E ratio is higher for a company with a higher growth rate. Thus using just the P/E ratio would make high-growth companies appear overvalued relative to others. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates. A lower ratio is 'better' (cheaper) and a higher ratio is 'worse' (expensive) - a PEG ratio of 1 means the company is fairly priced.
The Price/Book Value Ratio is a great price-multiple valuation metric to find companies that could be potentially undervalued or overvalued. If a firm has a Price/Book Value Ratio of less than 1, it is stated to be trading below breakup value. A lower P/BV Ratio can indicate a potentially mispriced company or indicate that something is fundamentally wrong with it.
EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. EPS growth rates help investors identify stocks that are increasing or decreasing in profitability. This profitability metric is generally a key driver in the price of the stock as it directly correlates to the profitability of the company as a whole.
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. We then screened for businesses that appear undervalued to earnings growth (PEG < 1)(P/BV<1). We next screened for businesses that have posted strong earnings growth for shareholders over an extended period of time (1-year fiscal EPS growth rate>10%)(1-year operating margin>15%). We did not screen out any market caps.
Do you think these stocks have what it takes to grow? Use our list along with your own analysis.
1) The Carlyle Group LP (CG)
The Carlyle Group LP has a Price/Earnings to Growth Ratio of 0.35, a Price/Book Value Ratio of 0.47, an Earnings Per Share Growth Rate of 10.31%, and an Operating Profit Margin of 31.67%. The short interest was 1.88% as of 08/17/2012. The Carlyle Group is an investment firm specializing in direct and fund of fund investments. Within direct investments, it specializes in management-led buyouts, privatizations, divestitures, strategic minority equity investments, structured credit, global distressed and corporate opportunities, small and middle market, equity private placements, consolidations and buildups, mezzanine and leveraged finance, and venture and growth capital financings, seed/startup, early venture, emerging growth, turnaround, mid venture, late venture, PIPES. The firm typically invests in agriculture, aerospace, defense, automotive, consumer, retail, industrial, infrastructure, energy, power, healthcare, software, technology, systems, real estate, financial services, transportation, business services, telecommunications, media, and logistics sectors.
2) Citizens Republic Bancorp, Inc. (CRBC)
|Industry:||Regional - Midwest Banks|
Citizens Republic Bancorp, Inc has a Price/Earnings to Growth Ratio of 0.50, a Price/Book Value Ratio of 0.62, an Earnings Per Share Growth Rate of 94.75%, and an Operating Profit Margin of 22.87%. The short interest was 5.21% as of 08/17/2012. Citizens Republic Bancorp, Inc. operates as the bank holding company for Citizens Bank that provides banking and financial services to individuals and businesses in Michigan, Wisconsin, Ohio, and Indiana. Its Regional Banking segment provides a range of lending, depository, and related financial services to individual consumers and businesses.
3) Mercantile Bank Corp. (MBWM)
|Industry:||Regional - Midwest Banks|
Mercantile Bank Corp. has a Price/Earnings to Growth Ratio of 0.79, a Price/Book Value Ratio of 0.98, an Earnings Per Share Growth Rate of 337.04%, and an Operating Profit Margin of 28.68%. The short interest was 7.54% as of 08/17/2012. Mercantile Bank Corporation operates as the bank holding company for Mercantile Bank of Michigan that provides banking services to small- to medium-sized businesses, individuals, and governmental units. The company offers various deposit products, including checking accounts, savings deposits, money market accounts, certificates of deposit, demand deposits, time deposits, and security repurchase agreements. Its loan portfolio comprises secured and unsecured commercial loans, such as loans and leases for working capital, accounts receivable financing, and machinery and equipment acquisition; commercial real estate financing loans consisting of new construction and land development; single-family residential real estate loans; home equity line of credit programs; residential mortgage loans; installment loans; and consumer loans, such as loans for new and used automobiles, boats, credit cards, and overdraft protection. In addition, the company provides telephone and online banking, courier services, and safe deposit facilities; and private passenger automobile, homeowners, personal inland marine, boat owners, recreational vehicle, dwelling fire, umbrella policies, small business, and life insurance products.
4) Republic Bancorp Inc. (RBCAA)
|Industry:||Regional - Southeast Banks|
Republic Bancorp Inc. has a Price/Earnings to Growth Ratio of 0.48, a Price/Book Value Ratio of 0.94, an Earnings Per Share Growth Rate of 45.17%, and an Operating Profit Margin of 55.17%. The short interest was 11.34% as of 08/17/2012. Republic Bancorp, Inc. operates as the holding company for Republic Bank & Trust Company and Republic Bank, which provides banking, tax refund solutions, and mortgage banking services to individuals and businesses in the United States. The company offers a range of deposit products, including demand deposits, money market accounts, brokered and Internet money market accounts, savings deposits, individual retirement accounts, time deposits, and certificates of deposit. It also provides single family residential real estate loans; commercial loans; residential construction real estate loans; and consumer loans, which consists of home improvement and home equity loans, as well as secured and unsecured personal loans.
5) Comerica Incorporated (CMA)
|Industry:||Regional - Midwest Banks|
Comerica Incorporated has a Price/Earnings to Growth Ratio of 0.83, a Price/Book Value Ratio of 0.85, an Earnings Per Share Growth Rate of 165.84%, and an Operating Profit Margin of 24.64%. The short interest was 5.14% as of 08/17/2012. Comerica Incorporated, through its subsidiaries, provides financial products and services primarily in Texas, Arizona, California, Florida, and Michigan. The company's Business Bank segment offers commercial loans and lines of credit, deposits, cash management, capital market products, international trade finance, letters of credit, foreign exchange management services, and loan syndication services to middle market businesses, multinational corporations, and governmental entities. Its Retail Bank segment provides small business banking and personal financial services consisting of consumer lending, consumer deposit gathering, and mortgage loan origination.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.