Ever since the economic meltdown of 2008, investors have viewed financial firms in a different light. The debacle that was marked by the collapse of Bear Stearns and Lehman Brothers changed the financial sector from one of stability and confidence to a collection of speculative plays marred by government intervention and interference. In spite of this conception, there are several financial firms that offer excellent growth potential that is not necessarily limited by high levels of risk. What follows is a discussion of some of the fastest growing financial firms trading today. While each should be evaluated within the context of one’s own portfolio, these companies are worth consideration for inclusion in a well-constructed portfolio.
Cninsure, Inc. (CISG) – Offering an interesting way for investors to make a China play, CISG offers insurance brokerage services in China, including in auto insurance. With the expected growth in the number of drivers crowding the streets of China, the growth potential for an early mover in this space is significant. Functioning primarily as a brokerage operation, the company has limited its exposure to the type of catastrophic events responsible for wreaking havoc with Japanese insurers. In terms of economic metrics, the company stacks up well with competitors like The Chubb Corporation (CB). On a price-to-earnings ratio basis, CISG is currently trading at a multiple of 3.96, where CB is trading over 11. The real strength of the company is reflected when the growth element is added. CISG has a price-to-earnings over growth (PEG) ratio of 0.26, relative to 1.37 for CB. A reading below 1 is generally considered favorable, so CISG really shines. Finally, with an operating margin approaching 50% at 49.4% relative to 23.2% for CB, the company appears to be well run and positioned to perform. Overall, CISG is a great growth addition to one’s financial portfolio.
Erie Indemnity Co. (ERIE) – Despite recently touching a new 52-week high and showing one of the largest increases in short interest of any publicly traded company over recent weeks, ERIE appears poised to go even higher. Furthermore, with a dividend yield of 2.7%, the stock offers an income element as well. The company has demonstrated quarterly revenue growth above 35% relative to an industry average around 6.5% and a return on equity of 11.4%, in line with the industry average around 12%. Relative to competitors like Arthur J. Gallagher and Co (AJG) and Marsh & McLennan Companies, Inc. (MMC), ERIE is somewhat expensive - it has a price-to-earnings ratio of 27.3 where AJG trades at a multiple of 22.5 and MMC trades at a multiple of 18.4. Even with growth included, ERIE trails slightly - the company has a price-to-earnings over growth (PEG) ratio of 3.2 relative to 2.4 for AJG and 1.6 for MMC. The true appeal of the stock is its momentum and long-term positioning. If the stock is able to break through the upper band of the current range, the high short interest may result in a short squeeze and drive the stock even higher. A short squeeze occurs when shorts are forced to buy the stock to cover a short position so as to avoid further losses.
Fifth Street Finance Corp. (FSC) – This somewhat unique financial offers both an excellent dividend yield of 11.5% and outstanding metrics in other categories. With a price-to-book of 0.9, the stock looks like a particular good deal on a valuation basis, particularly when one considers that the average for stocks with such competitive dividends is a price-to-book around 1.9 according to certain dividend tracking sources. In terms of its direct competitors, including Gladstone Capital Corp. (GLAD), the company is well positioned. GLAD had a negative return on equity in recent quarters and does not offer the strong income element available from FSC. Overall, FSC is a well-balanced play in the financial space that should offer plenty of upside to investors.
Investors Bancorp Inc. (ISBC) – Relative to its competitors - Fulton Financial Corp (FULT) and New York Community Bancorp Inc. (NYB) - ISBC provides a solid blend of growth, value and operating efficiency. While ISBC has a price-to-earnings ratio of 19.8 relative to 13.4 for FULT and 10.4 for NYB, it is when the growth component is added that the company is accurately evaluated. ISBC has a price-to-earnings over growth (PEG) ratio of 1.17 as compared with a PEG ratio of 0.56 for FULT and 1.8 for NYB. ISBC is not the strongest in the group, but when other factors are considered, the stock is attractive. On an operating margin basis, ISBC has a margin of 47.2% relative to 36.6% for FULT and 58.9% for NYB. Again, on this metric alone, ISBC is not the single standout, but it is these factors combined with the strong growth profile that makes this stock one to own.
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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.
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