2 Financial Stocks to Buy Today

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I'm always on the lookout for new investment opportunities. To find these ideas, many times I stop by the Fool.com CAPS Screener to try and separate the winners from the losers. Having worked in the financial services industry, I always look for up and coming companies in this segment of the market. Mid-cap companies can be attractive options, as they are not as well followed, yet they have plenty of room for growth. To make sure I find companies that are growing, I asked for stocks in this field that showed at least 10% revenue growth, and at least 20% EPS growth over the last three years. There were two companies that met these criteria that looked like good options for an investment right now. 

Prospect Capital (NASDAQ: PSEC):

Prospect Capital is a mid-sized business development and private equity firm. The best way to describe them is to say that they invest in companies that bigger banks either aren't comfortable with, or can't take the time to deal with. Prospect talks to small and medium sized businesses and gives them capital in exchange for debt or sometimes an equity stake in the company.

Prospect isn't alone in this field either; along with smaller players, they count Apollo (NASDAQ: AINV) as competition. The difference between the two companies is that, while they both pay large dividends, Prospect shows better earnings growth and a better balance sheet. Prospect currently pays a trailing yield of 11.54%, versus 10.27% at Apollo. Both companies sell for nearly the same multiple at about 9 times forward earnings, and analysts expect both to grow by just 5% in the next few years.

However, while it's possible Apollo will do worse than these expectations, Prospect could do better. In the last four quarters, Prospect has beaten expectations on average by 8.5%. By contrast, Apollo has missed estimates on average by nearly 7%. In addition, using Peter Lynch's measure of financial strength at a company, the equity-to-assets ratio, Prospect Capital wins again. The company's equity-to-assets ratio is 0.67, versus Apollo coming in at 0.58. Investors looking for a sustainable high-yield stock should look to Prospect Capital first. It's not every day you find a company paying an over 11% yield, is also financially strong, and is beating earnings estimates.

Waddell & Reed Financial (NYSE: WDR):

The other company that met my criteria was investment manager Waddell & Reed. The company offers investment advice, underwriting, and distribution capabilities. Investors looking for a way to benefit from a stronger stock market should give this company serious consideration. Waddell & Reed offers a 3.05% dividend yield, and analysts expect strong EPS growth of 11.5% over the next few years.

By point of comparison, competitor Eaton Vance (NYSE: EV) offers similar capabilities, yet pays a lower yield (2.83%) and is expected to grow at a lower rate (7.7%). In similar fashion to Prospect Capital, Waddell & Reed also has the advantage of routinely beating analysts estimates. Though the company has actually beaten estimates twice, and missed twice, on average they are still coming out ahead by nearly 3% per quarter. Eaton Vance, on the other hand, is doing almost the exact opposite by missing analysts projections by an average of almost 4% over the last four quarters. Waddell & Reed also shows a strong balance sheet with an equity-to-assets ratio of over 0.47. Investment managers tend to do very well when the market does well. If you believe as I do that after the volatility of the last 12-18 months, the market should have better days ahead of it, which means Waddell & Reed could be an attractive option. 

Conclusion:

Whether you want a high-yield from a lender to small and medium sized businesses, or growth and income from an investment manager, mid-cap stocks are the place to find these bargains. The companies are still small enough to not have caught the attention of Wall Street, yet they are big enough to offer stability that smaller cap players can't offer. I would suggest investors look to add both of these candidates to their personalized Watchlist to keep up with developments.


MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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