My Top Diversified Financial Services Stocks For 2015

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Includes: CBOE, CME, CODI, GCAP, ICE, MCO, MRLN, TPL, VOYA
by: Stan Stafford

Summary

In this series of articles, I will be reviewing individual industry sectors and selecting my favorite stock picks for 2015.

For Part 17, I will be reviewing the Diversified Financial Services industry sector, taking a look at revenue/earnings growth, valuations, recent performance, and the overall financial stability of companies.

Out of this group of reviewed stocks, my top stocks for 2015 are Compass Diversified and GAIN Capital Holdings.

Overview

In this series of articles, I will be taking a look at various industry sectors and selecting what I believe will be outperforming stocks for 2015. In Part 1, I reviewed 47 stocks within the Aerospace and Defense industry sector. For part 17, in determining my favorite stocks in this sector for 2015, I will review the following Diversified Financial Services stocks:

  • B Riley Financial (OTCQB:RILY)
  • Berkshire Hathaway (NYSE:BRK.A)
  • California First National (NASDAQ:CFNB)
  • CBOE Holdings (NASDAQ:CBOE)
  • CME Group (NASDAQ:CME)
  • Compass Diversified Holdings (NYSE:CODI)
  • GAIN Capital Holdings (NYSE:GCAP)
  • Intercontinental Exchange (NYSE:ICE)
  • Leucadia National (LUK)
  • MarketAxess Holdings (NASDAQ:MKTX)
  • Marlin Business Services (NASDAQ:MRLN)
  • McGraw Hill Financial (MHFI)
  • Moody's (NYSE:MCO)
  • NASDAQ OMX Group (NASDAQ:NDAQ)
  • NewStar Financial (NASDAQ:NEWS)
  • PHH (NYSE:PHH)
  • Resource America (NASDAQ:REXI)
  • Texas Pacific Land Trust (NYSE:TPL)
  • Tiptree Financial (OTC:TIPT)
  • Voya Financial (NYSE:VOYA)

Step 1

The first step I took to narrow down the list of possible options was to look at the earnings over the past five years of these stocks within the industry sector. I removed the following stocks from further review because of their negative or flat (less than 3%) earnings growth over the past five years:

  • B Riley Financial
  • California First National
  • Leucadia National
  • McGraw Hill Financial
  • NewStar Financial
  • PHH
  • Resource America
  • Tiptree Financial

Step 2

I then took the list of remaining stocks and checked the revenue growth of each over the past two years. I planned on removing any stocks that had flat (less than 2%) growth or saw a decline in revenue over the past two years; however, none of the remaining stocks fit this criteria.

Step 3

My next move was to examine the trailing PEG ratio of each of the remaining stocks. I removed any stock that had a PEG ratio over 3 to focus more specifically on fairly valued/undervalued stocks. These stocks included:

  • Berkshire Hathaway
  • MarketAxess Holdings
  • NASDAQ OMX Group

Step 4

The next set of data I reviewed was the Fundamental and Value Scores for each of the ten remaining stocks. These scores are calculated by YCharts and I have found them to be very useful when researching investment options. More details on each of the scores can be found here and here.

  Fundamental Score Value Score
CBOE Holdings 9 3
CME Group 10 9
Compass Diversified 9 10
GAIN Capital Holdings 8 9
Intercontinental Exchange 10 5

Marlin Business Services

7 9
Moody's 9 4
Texas Pacific Land Trust 8 3
Voya Financial 6 8

To determine the best stocks for 2015, I'm only taking into consideration stocks with a combined score of 15 or higher. Doing this left me with the following remaining stocks:

  • CME Group
  • Compass Diversified
  • GAIN Capital Holdings
  • Intercontinental Exchange
  • Marlin Business Services

Step 5

My next step was to look at the book value of each company and to remove any stock that has seen a decrease in its book value over the past five years. None of the five remaining stocks saw a decline in book value during this time period.

Step 6

My next step was to look closer at each stock remaining that passed all previous criteria and determine whether or not there were any reasons to eliminate them as great stock candidates for 2015. In doing so, I reviewed the financials of each company, the most recent quarterly report transcripts, and searched for any news items that warranted concern.

CME Group

In its last quarter, the company posted a 22% increase in revenue and an increase in earnings per share by more than 50% compared to the same period last year. The company saw an increase of 30% in average daily volume, which resulted in the 2nd highest quarterly volume in the company's history.

Every product area displayed growth in the quarter, ranging from 14% growth in metals to 41% growth in interest rates. With roughly 30% of the company's revenue coming internationally, CME continues to look for growth abroad as it recently signed a letter of intent with the Taiwan Futures Exchange.

Compass Diversified

In its last quarter, the company posted a 14% increase in revenue and earnings per share of $0.13 which is significantly better than the loss that was realized in the same period last year. Within that quarter, the company consummated two new acquisitions (Candle Lamp Company and American Environmental Services).

The company maintains a solid balance sheet and should continue to see significant growth as its new acquisitions will help both the strategic and financial goals of the company moving forward.

GAIN Capital Holdings

In its last quarter, the company reported a 37% increase in revenue and a 273% increase in earnings per share compared to the same period last year. The company saw growth in its retail OTC business, its institutional business, and futures.

With a strong financial outlook and new and planned future acquisitions, GAIN Capital appears positioned to see significant future growth as it adds diversity both geographically and across products to become a larger global presence.

Intercontinental Exchange

In its last quarter, the company posted a 49% increase in revenue and a 30% increase in earnings per share compared to the same period last year. This marked the ninth consecutive year of record revenues and adjusted earnings for the company and considering its strong balance sheet, new acquisitions, new products, and growing demand/volumes across multiple areas I see no reason why this trend won't continue again for a tenth straight year.

Marlin Business Services

In its last quarter, earnings per share increase from $0.26 to $0.38 compared to the same period last year, while net interest and fee income was basically flat. Marline Business Services appears poised to continue seeing significant growth as it displayed improvements across revenue, earnings, dividend, return on equity, and average earning assets for the full year.

Through both its increased dividend and its share buyback program, the company appears committed to returning shareholder value to its investors.

Conclusion

While I do find that each of the five remaining stocks all have positive factors that make them interesting long term investment options, but a few of them have issues that I think will limit short term price appreciation.

Marlin Business Services has a concerning free cash flow yield that makes me hesitant about its current 13x PE ratio and whether or not that is a current value.

CME Free Cash Flow Yield (<a href=

CME Free Cash Flow Yield (NYSE:TTM) data by YCharts

Both Intercontinental Exchange and CME Group have low quality ratio scores that have only fallen over the past several years.

CME Quality Ratio Score Chart

CME Quality Ratio Score data by YCharts

I believe that Compass Diversified and GAIN Capital Holdings have the strongest short term growth drivers in place that could lead to significant short term returns for the remainder of 2015. Because of their attractive valuations, strong financial positions, and growth potential, they are my top stocks in this sector for the year.

For part eighteen of this series, I will be reviewing the Diversified Telecommunications Services industry sector. As always, I suggest individual investors perform their own research before making any investment decisions.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.