Here I'm providing two lists with almost similar characteristics. Most are somewhere in the financial food chain - either banks, holding companies, REITS, or trusts that pay out most of their earnings. I am of the opinion that US equities, inclusive of the strong start to 2012, remain significantly undervalued. Some of the high yields paid by companies with solid balance sheets are indicative of market irrationality.
This first list consists of companies which experienced significant earnings growth in the prior year and are also paying a relatively high dividend based on an overly depressed stock price. Because of the continuous low interest rate environment, investors will begin moving along the capital structure in search of higher yields, and pretty soon, these are some of the stocks they'll start considering, especially if their earnings trajectories continue in the same direction, which does appear to be the case for the following names:
Anworth Mortgage REIT (NYSE:ANH) - Yield of 12.8% and a strong quantitative picture that could take the stock from below $6.75 to $10 where the almost 13% yield will be 8%, but with your cost average under $7, your yield will remain the same and if the fundamentals of this and the following companies continue, for patient long-term investors willing to hold and reinvest those dividends to compound your gains over a 5 year period, the potentials are huge.
Alta Polermo (NASDAQ:APSA) - 11.4% yield, but the ADR trades way too thin, so there's no "trading" of this name. If you take it, plan on holding it for a while.
Apollo Commercial Real Estate Finance (NYSE:ARI) - 163% earnings growth (YoY) and a yield of 10.7%. A possible move to $17 is in the near-term future, but it's another stock with low volume, so BE CAREFUL.
Armour Residential REIT (NYSE:ARR) - 19% yield following 165% EPS growth (YoY). The stock flatlined between $7 and $7.50, but I'll take a solid flat line with a 19% yield over volatility any day. 19% and no volatility!
BGC Partners (NASDAQ:BGCP) - This one is one of my favorites. Although it's offering one of the lower yields of "only" 10%, it's showing the greatest potential for capital appreciation on top of that yield, so I'll overweight a little in this name.
Banco Macro (NYSE:BMA) - 9% yield with major appreciation potential. Although the reported numbers were phenomenal and the bank's balance sheet looks better than ever, the one thing that I hold heavily against this company is the fact that it's based in Argentina, an unfriendly country for financiers and foreign capital investments. This doesn't meant there aren't amazing values to be had if one looks hard enough, but no matter how good the deal looks, remain lightweight, keeping positions at the lower range of your average size. Hopefully they'll figure out the rules of capitalism in a free market world and start playing by them or face a merry-go-round of IMF loans, capital flight restrictions, and devaluations. The country is notorious for frequently raiding the savings of the country's middle class.
This second list contains capital appreciation trades. These stocks are breaking out or are about to. Most also have a yield attached to them. Strong yields continue to suggest equities are undervalued. I'm a firm table pounding bull on US equities and every few years or so, I'll look at a long list of trades generated by proprietary models and as I do the research on each name, I get this sick feeling in my stomach that I don't have enough capital to put to work. That's generally when the market tends to be on the precipice of a major move.
Although US equities have had a strong start to 2012's election year, this is just the beginning to put us close to 10 year highs across several sectors. As I've said for a long time, my favorite sector, purely as a play on widening profit margins after an inevitable uptick in interest rates remains banking stocks and the overall financial sector. Structured securities as holding companies for dividend paying stocks in the financial sector are great alternatives to income vehicles, plus capital appreciation potential. There are even a few with downside risk protection of capital. Banks that made it through the tsunami ended up gathering assets via generous FDIC bailouts that gave busted banks to the stronger players for as little as $1.
If and when interest rates begin to inch up even slightly, rates banks are paying now, between 0.10% and 0.80%, will cause margins to blow out as they earn 4%-6% on that capital. We're talking about historically unprecedented spreads of 400-500 basis points, and if the bank says it's paying a dividend and the yield looks high, the chances of the bank paying the yield are better than them lowering or canceling the dividend. The yield is a reflection of irrational markets discounting stocks as if there hasn't been monumental shifts in balance sheets that look like polar opposites of dangerously leveraged balance sheets during 2006-2007.
The de-leveraging is what started the great cascade sell-off. We are closer to the end of that "great de-leveraging" than we are to the beginning, so with the rise of reserves, the forced acceptance of TARP capital and the continued quantitative easing underway by the Federal Reserve, there's a great deal of money sloshing around the system looking for places to earn a return. I haven't seen such a powerful propensity to earn such high returns in US equities for almost 15 years.
Fifth Third (NASDAQ:FITB) - Accumulating under $14.50 with an upside of $21 as a first test of selling pressure, but a strong long-term portfolio play.
Huntington Banc Shares (NASDAQ:HBAN) - Any trade above $6.20 on strong volume is a final breakout from 2 years of a flat-lining market.
KeyCorp (NYSE:KEY) - The bank everyone loves to hate. The stock has been in a very tight range contraction since the start of the year, and appears ready to blow up like a rocket ship. Watch carefully.
MT&B (NYSE:MTB) - Quantitative signature is very similar to that of Huntington Banc Shares, but MTB is a few trading session ahead. Buy into any back and fill action with an overhead target of $100.
PNC Financial (NYSE:PNC) - Similar set-up as KEY, but a break at this point is a multi-year breakout through technical resistance and sets up a test of $80 for the first upside target. Fundamentally, this bank is very well managed, extremely conservative in its holdings, keeps higher than average reserves, and was able to weather the financial meltdown of 2008 without even a scratch. Always strong and never part of the Fed's list of mandatory stress-tests, PNC is a banking stock that trades more volatile than usual because it attracts a lot of fast money, day trading types, but this can also be a plus because long-term buyers of this stock can take advantage of fast money-induced, short-term panics.
Wells Fargo (NYSE:WFC) - Major show of strength by the bulls on Friday with surprisingly high volume ahead of a long weekend. This is a very high probability trade with great risk/reward numbers. First target is $38. I can honestly say that Wells Fargo is probably the best managed bank in the country. The management team consists of some of the brightest bankers in the industry, their maneuvering during the 2008 crisis was awe inspiring, and a few tactical big acquisitions fattened up their asset base and expanded them into the Midwest from a West Coast only bank. I see them becoming a national name over the next five to seven years.
This is only a small list of names currently being considered for investment. If you wish to keep a close tab on new ideas similar to those above, keep an eye on InvestmentCapitalist.com as well as Seeking Alpha for follow-ups to this investment theme.