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3 Small Financial Stocks With Big Potential

Smaller financial stocks are still undervalued


When most people thing of financial stocks, the names that come to mind are the big banks like Bank of America (BAC) or insurance giants like Met Life (MET).

financial-stocksThese stocks have done very well over the past few years, and many people treat them as bellwethers for the stock market’s overall direction.

However, many of these stocks have moved up to the point that they can no longer be considered bargain issues. The large-cap financial stocks have seen enormous amounts of money pouring in as investors bet on the economic and credit recovery that has taken place over the past four years.

However, if we look at the smaller financial stocks we can still find solid bargains that aren’t necessarily on Wall Street’s radar screen and are still cheap enough to merit consideration by long-term value investor. Kansas City Life (KCLI) is a company that I have mentioned in the past and is worth consideration. The stock has risen over the past year, but KCLI still trades at just 75% of book value at the current price.

There is nothing horribly complex about this Kansas City Life. The company sticks to the basics, selling life insurance and annuities and investing its portfolio conservatively. And so far, it has worked pretty well — the company has been around since 1895. Insiders own more than 60% of the company, so they have a vested interest in solid business practice and a higher stock price.

Charter Financial (CHFN) is a small bank with 16 branches in west-central Georgia, east-central Alabama, and the Florida Panhandle, as well as in Norcross, Georgia. Charter completed the process of converting to a fully stock-holder owned institution by doing a second-step conversion and stock offering last year. As a result, CHFN has a lot of excess capital at the moment. Charter currently has an equity-to-assets ratio of 19, well above the industry average of 10.2.

The company recently enacted a stock buyback plan and has been aggressively buying back shares in the open market. CHFN stock also yields 1.88% at the current stock price, and I would expect to see Charter raise that over the next few years as it uses its excess capital to increase shareholder value. The stock currently trades at just 86% of book value and appears to be a bargain issue worth owning by patient investors.

One of the more intriguing small financial stocks trading at a steep discount to asset value is Asta Funding (ASFI) The company is in the debt collection business and got burned by a portfolio of bad debts with unusually low collection rates. Slowly but surely, ASFI has positioned itself to grow, and it has expanded into structured settlements and a disability assistance practice to diversify the company.

ASFI stock is very cheap at just 60% of tangible book value. The first sign of good news will likely propel this stock up to book value, and possibly well above that level over time.

Note: These small-cap stocks have tiny trading volumes, which means the slightest news can send them rocketing up … or crashing down. If you do invest, be sure to protect yourself with stop-losses.

The larger financial stocks have had a strong move and are nowhere near the bargains they were a couple of years ago. However investors willing to dig deeper in the sector can still find bargains with these smaller financial stocks that have excellent long-term potential.

As of this writing, Tim Melvin was long CHFN, ASFI and KCLI.

Article printed from InvestorPlace Media,

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