3 Compelling “Under the Radar” Financial Stocks

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The financial sector has posted strong performance thus far in 2013. The Financial Select Sector SPDR ETF is up just under 20% year to date, led by strength from larger banks and insurers. Rising interest rates and spreads should continue to buoy their shares. Here are three “under the radar” financial stocks that show significant growth and offer compelling valuations. While they do not get much attention in the financial press, they look like they have strong prospects ahead of them.

A Student Loan Play

Performant Financial (NASDAQ: PFMT) recovers delinquent or defaulted assets and improper payments for government and private clients. It specializes in student loan collection, from which it gets approximately two-thirds of its fee revenue. The company's remaining revenues come primarily from recovering on a variety of healthcare and state tax payment arrears.

The amount of student loan debt recently crossed over the $1 trillion mark, and it's growing at over 10% a year. Defaults stand at approximately 13% of the overall outstanding loans total not counting deferrals. The total amount of student loans in default is now at just under $80 billion, and has grown at a 15% annual rate over the past five years, as graduates continue to face a challenging job market. Performant has worked with the Department of Education for over two decades to recover on these defaulted student loans.

This increase in student loan defaults is a core driver of Performant’s earnings and revenue growth over the past few years. It has allowed the company to grow earnings at better than a 40% annual rate over the last four years.

Performant reported quarterly results this week that beat the consensus estimate by approximately 10% on both the top and the bottom lines. The company is tracking to 15% earnings growth in 2013 and analysts see a similar increase in earnings in 2014. Revenues are also growing in the mid-teens. Given the company’s earnings and revenue growth, the stock is offering an attractive entry point at just over 12 times next year’s consensus earnings estimates.

A Fast-Growing Mortgage Servicer

Ocwen Financial ((NYSE: OCN) services residential and commercial mortgage loans. The company has grown its mortgage servicing rights portfolio at better than a 35% average annual rate since 2000, and its future looks bright as well.

One of the unintended consequences of Dod -Frank and other regulations aimed at financial institutions is that it has encouraged banks to unload their mortgage servicing rights (MSRs), since new rules force banks to hold more capital against MSRs.

An MSR conveys the right to service a mortgage loan, in exchange for small percentage fee based on the balance of the mortgage. In this case, "servicing" can include collecting monthly mortgage payments, and paying any tax and insurance payments or remaining balance to the loan holder. As banks sell these rights at discounted prices, cheaply purchased MSRs could become core driver in mortgage servicers' portfolio growth for many years to come.

The company has grown its servicing portfolio at better than a 35% annual rate since 2000. The effects of these latest regulations should continue to allow the company to grow its portfolio at an impressive rate.

Ocwen Financial has provided its shareholders with more than a 1,000% return over the past five years. However, the stock is still offering investors a compelling valuation given its growth prospects. It is selling at just over 12 times this year’s expected earnings. In addition, the company's recent acquisitions include a top prime mortgage servicer and a reverse mortgage business. These should help the company diversify its revenue streams and provide new growth avenues.

An Undervalued European Insurer

Aegon N.V. (NYSE: AEG) is a leading international insurance group that primarily offers life insurance, pension, savings and investment products. Like most insurers, the company is benefiting from higher interest rates, which buoy its investment returns and offer more attractive rates to buyers of its annuities.

This Netherlands based insurer is also cheap at around 40% of book value. Even though the company resides in Europe, over 70% of its revenues come from the United States -- a fact most of the market currently doesn't understand.

Negative sentiment regarding European equities has hurt the stock, but that bad reputation should improve; it appears the continent is in the early stages of emerging from almost two years of economic contraction. Unemployment fell for the first time in two years in Europe during July, and Eurozone PMI crossed the expansionary 50 level for the first time in 18 months as well.

Though its stock is selling at around 15% of its level prior to the financial crisis, the company is almost finished with a significant restructuring that will give it a solid operating base and enhanced capital strength. Aegon reinstated its dividend in 2012 and yields more than 3%. Earnings are projected to grow again in 2014, after declining in 2013. The stock is not expensive at less than 10 times trailing earnings, given its turnaround potential, low book value, and dividend yield.

In conclusion...

Performant and Ocwen Financial have an impressive recent history of significant revenue & earnings increases. Both stocks should appeal to growth investors at these valuations.

Aegon is an undervalued turnaround pick that should do well as interest rates continue to rise from historically low levels. It should appeal to patient value investors.

All three selections look compelling at these price levels. As long as the financial markets continue to steadily improve, and we do not have a recurrence of an European debt or other crisis, these stocks should all do well over time.


Bret Jensen owns shares of Ocwen Financial. The Motley Fool has no position in any of the stocks mentioned. 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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