Looking to the Mid-Cap Financials For Value
Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Want to get into the financial sector for a long time to come? Great! You don't have to jump feet first into Bank of America or even Citi, instead, I'd recommend that you set your sights a little lower, maybe by looking at the mid-cap financials.
Financials are a tricky area to get into, there’s no doubting that. Navigating your way through the leverage, huge asset numbers and mountains of debt that some financial service companies have can get complicated. To avoid all of these messy companies I came up with a list of things that I look for when it comes to investing in the financials.
The company should pay a dividend, I’m a fan of getting some of my money back, even if it is reinvested at a later date. The second thing that I look for is a financial that doesn’t seem to have excessive debt. Some banks utilize lots of debt in their operations, it can get tricky to work out what's good and whats bad so I just stay away. Third, if that bank has been seen as using ‘risky’ strategies in the past then I’m staying away, it’s not a stock that I want for the long term. The final thing that I look for is value. The company should be ‘cheap.’ I don’t want to be spending $1.50 on each $1 of investment, I’m looking for solid value.
Now that we have gotten the requirements out of the way, let’s take a look at some great mid-cap financials that I think are solid investments for years to come. My favorites are CME Group (NASDAQ: CME), T. Rowe Price (NASDAQ: TROW) and Huntington Bancshares (NASDAQ: HBAN).
Huntington Bancshares is like your typical Bank of America, they have a presence across the country, and they provide both commercial and consumer banking solutions by providing mortgages, car loans and business loans.
Huntington Bancshares meets the criteria that we were looking for, their P/E is right around the 10 mark and their price to book ratio is 1.05 showing that they are not expensively priced. The company also pays a dividend that yields 2.4% with a payout ratio of 24%.
In 2007 HBAN was trading in the $20/share range. There’s a long way to go for this stock if you believe it can make it back to those levels and if you look at the fundamentals you shouldn’t be able to see any reason why it won’t.
HBAN is trading at ~9 times free cash flow and brings a 21% net profit margin to the table. EPS growth was huge in 2012 and estimates from analysts have it still growing in 2013.
This century old company (after a few mergers) has grown a lot over its time to become one of the world’s biggest exchange operators. CME Group focuses on publically traded futures and happens to be the world’s largest handler of derivative contracts. In order to make money, CME Group charges a transaction fee on all of those contracts that change hands on their exchanges.
The company has an $18-billion market cap and a 12x P/E ratio along with it. The PEG ratio of CME group is at 1.6 and the price-to-book is an incredibly low 0.79. This stock also pays a dividend, and it’s on the high end yielding 3.5% with a payout ratio of 50%.
Analysts foresee growth in the company. An estimated earnings figure for close of FY 2012 comes in at $3.04 per share, 2013 at $3.33 and $3.79 in 2014. Those numbers give us a double digit growth rate going forward, something that I like the look of!
T. Rowe Price
T. Rowe Price is a mutual fund provider with a market cap of $17 billion. This company has continued on a great growth path over the last year, five years and even the decade. Their mutual funds continue to do great against the market and have continued investment demand from the public as a result.
T. Rowe Price has the highest P/E of the stocks in this article with a 21.27. The forward P/E of the company is currently at 17.87 and the PEG ratio is 1.44. If we look at the dividend, we’ll see a yield of 2%, but the real meat of the story comes when you see that in the year 2000 TROW paid a dividend of $0.065 per share and it has since increased to a $0.34 dividend, even despite a stock split. If you're looking for yield, that great growth is something that you'll no doubt enjoy.
Revenues at T. Rowe Price will continue to grow through 2016, according to analysts and the company will continue to extract more net income during that time as well. I think that this company is a great buy with very little downside risk, as made evident in the 2007/2008 downturn.
Ash1402 has no position in any stocks mentioned. The Motley Fool owns shares of CME Group and Huntington Bancshares. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!