The Financial Services sector has given good results so far this year, the total return, year to date (10/05/2012), was 21.31%, while the appreciation of the Russell 3000 index in the same period was 15.91%.
Stock Sectors' Total Returns, Year to Date, are shown in the table below (Data through 10/05/2012):
Nevertheless, there are some important financial stocks that, for one reason or another, have fallen out of favor, but are starting to show some strength. However, in order to find such stocks, a technical analysis with an RSI indicator can be of great assistance for investors.
I have elaborated a screening method which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.
The screen's formula requires all stocks to comply with all following demands:
- The stock is included in the Russell 3000 index. Russell Investment explanation: "The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected."
- Earnings growth estimates for the next 5 years (per annum) is greater than 6%.
- Price to free cash flow is positive, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
- Total debt to equity is less than 0.6.
- RSI (14 days) is above 30 and RSI (14 days) was below 30 in one of the last 3 days. [The Relative Strength Index (RSI) is an oscillator that measures current price strength in relation to previous prices. The classic way to interpret RSI is to look for oversold levels below 30 and overbought levels above 70. When the RSI crosses above the oversold line (30) it is considered buy signal].
I used Portfolio123's powerful free screener to perform the search. After running this screen on October 07, 2012, I obtained as results the 3 following stocks:
DuPont Fabros Technology, Inc. (DFT)
DuPont Fabros Technology is a real estate investment trust and leading owner, developer, operator and manager of wholesale data centers. The company says that its data centers are highly specialized, secure, network-neutral facilities used primarily by national and international Internet and enterprise companies to house, power and cool the computer servers that support many of their most critical business processes.
DuPont Fabros has a low debt (total debt to equity is 0.58). The average annual earnings growth for the past 5 years has been quite high at 19.71% and the average annual earnings growth estimates for the next 5 years is 12.25%. DuPont Fabros pays a dividend, and the forward annual dividend yield is quite high at 2.42%. The company is trading 13.9% below its 52-week high and has 15.3% upside potential based on the consensus mean target price of $28.59 for the company. All these factors make the stock quite attractive.
LTC Properties Inc. (LTC)
LTC Properties, Inc. is a self-administered real estate investment trust that invests primarily in the long-term care sector of the health care industry through the origination of first mortgage loans and acquisition of properties that are leased to numerous long-term care providers.
LTC Properties has a low debt (total debt to equity is only 0.37). LTC Properties pays a dividend, and the forward annual dividend yield is very high at 5.83%. The company is trading 14.8% below its 52-week high and has 15.2% upside potential based on the consensus mean target price of $36.75 for the company. All these factors make the stock quite attractive.
Protective Life Corporation (PL)
Protective Life Corporation, through its subsidiaries, provides various financial services primarily in the United States. The company engages in the production, distribution, and administration of insurance and investment products.
Protective Life Corporation has a low debt (total debt to equity is 0.54) and its price to free cash flow for the trailing 12 months is very low at 4.75. Protective Life pays a dividend, and the forward annual dividend yield is quite high at 2.70%. The company is trading 12.2% below its 52-week high and has 15.4% upside potential based on the consensus mean target price of $30.75 for the company. The PL stock seems to be a good investment right now.