Some Undervalued, High-Yield Financial Stocks for 2012 and Beyond
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Psst - wanna buy some cheap stocks? Lend me your ear (or rather, your eyes) and take a gander at these gems!
KKR Financial Holdings LLC (NYSE: KFN), together with its subsidiaries, operates as a specialty finance company with expertise in a range of asset classes. With a 21% Return on Equity (ROE), and Price/Book of 0.96, the stock is trading at a trailing P/E of 4.98. The dividend yield is 8.1% at a payout ratio of only 35% so there is some room to increase the dividend even further. There has been some recent insider buying, which is a good indication of improved future performance in the stock.
The company plans to take advantage of the current lending environment to increase their holdings. Erik Falk, co-head of leveraged credit operations at KKR Asset Management, said the firm is planning a major senior lending initiative for 2012, following the close in October of a $1 billion mezzanine fund, its first such pool. KFN looks like a Buy at less than $9/share.
Triangle Capital Corp. (NYSE: TCAP) is a business development company (BDC) specializing in private equity and venture capital investments. It primarily invests in companies located throughout the United States, with an emphasis on the Southeast and Mid-Atlantic. With a 20% ROE, and P/B of 1.3, the company has a five-year expected PEG ratio of 0.95 and experienced 143% quarterly earnings growth from 2010 to 2011. The current dividend yield is 9.7% at a 60% payout ratio. There has also been recent insider buying. I would rate this stock a Buy at a share price under $20.
Main Street Capital Corp. (NYSE: MAIN) is a BDC specializing in equity, equity related, and debt investments in small and lower middle market companies. The firm primarily invests in companies based in the Southern, South Central, and Southwestern regions of the United States but also considers other domestic investment opportunities. With an 18% ROE, P/B of 1.48, and expected five-year PEG of 1.84, the stock looks slightly under-valued. Quarterly earnings growth from 2010 to 2011 was just under 32%. The dividend yield is 7.6% at a 63% payout ratio. Insiders have been buying. I would rate this stock a Hold at its current valuation and would look to add shares at a price under $18. The stock was recently downgraded to Neutral from Buy by Ladenburg.
TICC Capital Corp. (NASDAQ: TICC), another BDC, operates as a closed-end, non-diversified management investment company. The firm invests in both public and private companies. The company was formerly known as Technology Investment Capital Corp. and changed its name to TICC Capital Corp. in December 2007. It seeks to exit its investments within seven years. TICC is one of the smaller BDCs in this analysis with a market cap of $315M. With a P/B of 1.0 and expected five-year PEG of 0.66, it is also one of the cheapest stocks in this group. The current dividend yield is 10.6% at a 51% payout ratio. There has been recent insider buying. TICC performed poorly in 2011 but looks poised for future growth. I would rate this stock a Buy at under $10, especially considering the high dividend and excellent growth prospects.
Conclusion - There are several excellent opportunities in the stock market for growth and income investors in the BDC space in particular. With the difficult lending environment for banks and continued low interest rates, BDCs are filling the gap for small to medium-sized companies with high growth prospects that require venture capital to help fund their growth.
There are obviously risks associated with each of these stocks that need to be considered based on your individual risk tolerance. The higher rewards generally involve higher risks (e.g., TICC). These are just a few ideas to consider but further due diligence is necessary before making an investment decision.
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