3 Financial Stocks That Are Headed Higher

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The stock market has staged a strong rally so far in 2013, and more gains could be on the way for investors. The market looks to be in a sweet spot, with the Federal Reserve and other central banks continuing to provide accommodative monetary policy, even as the economy strengthens and confidence returns. At the same time, equity valuations remain reasonable and deal activity has picked up during the first few months of the year. 

Given a strong investing backdrop, market participants may want to consider adding risk to their portfolios in an attempt to capitalize on improving trends across the economy, including the job market and the housing sector. In the current environment, riskier sectors such as basic materials, retail, and financial stocks may outperform the major averages. Below, I will examine three financial stocks that have ridden the market momentum to new 52-week highs in recent days. 

Howard Hughes (NYSE: HHC)

This company is a developer and operator of master planned and mixed used properties. As the economy has continued to heal, particularly with improvements in the labor and housing markets, Howard Hughes shares have risen. Over the last year, the stock is up around 30% compared to a gain for the S&P 500 of roughly 10%. Year-to-date, the shares have surged around 15%, and the stock is currently sitting at new 52-week highs.

Although Howard Hughes is a sleepy company that does not get a lot of attention, one of its largest shareholders is Bill Ackman's hedge fund, Pershing Square Capital Management. As of the beginning of the year, the fund held a roughly 9% stake in the company, suggesting that this is a name that investors should not overlook.

NYSE Euronext (NYSE: NYX)

After a deal to be acquired by the Deutsche Boerse fell through in early 2012, NYSE Euronext subsequently agreed to be acquired by futures exchange-operator IntercontinentalExchange (NYSE: ICE) in December 2012, in a transaction valued at $8 billion.

Under the terms of the deal, Euronext shareholders would receive either $33.12 in cash for each share owned, 0.2581 IntercontinentalExchange shares, or a combination of $11.27 in cash per share plus 0.1703 shares of IntercontinentalExchange. Even after the acquisition was announced, investors are still making money in Euronext because of the option to accept IntercontinentalExchange stock in the deal.

In fact, NYSE Euronext is trading substantially above the cash consideration of $33.12 in the transaction, with shares recently breaching the $38 level. This is because IntercontinentalExchange shares have been rising. In fact, since the deal was announced, Euronext has risen another 18% on the back of strength in IntercontinentalExchange, which has gained almost 28% over the last 3 months.

By purchasing NYSE Euronext, investors can limit their downside (because of the deal that is on the table), while also participating in IntercontinentalExchange's upside.

Legg Mason (NYSE: LM)

This company's asset management business was hurt significantly by the financial crisis, and the stock has never really recovered. The rise of ETFs has also hurt Legg Mason, which has historically been focused on mutual funds. Nevertheless, the company is looking to expand its exchange-traded fund footprint with a trio of actively managed ETFs.

“We think actively managed ETFs are going to have some legs and that’s a place we want to be positioned,” Legg Mason Chief Financial Officer Peter Nachtwey said at a conference on March 5. The company hopes that new product offerings will reverse the outflows its funds have seen in recent years.

Investors are also turning more optimistic on the company amid the current stock market rally and the appointment of Joseph Sullivan as the firm's new CEO in February. Year-to-date, the shares are up more than 23% to a new 52-week high with most of the gains coming over the last month.

Bottom line

Although it is impossible to tell what the future will hold, the investing landscape is very attractive right now due to a confluence of factors. Continued dovish monetary policy on the part of world central banks, along with improvements in key areas such as the labor and housing markets are pushing equity valuations up at the beginning of 2013.

In this type of environment, investors may want to add risk to their portfolios by purchasing financial stocks which are experiencing strong momentum amid the market rally.

Ryan Glosier has no position in any stocks mentioned. The Motley Fool recommends NYSE Euronext. The Motley Fool owns shares of Howard Hughes. 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!

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