This week has been a tough one for stocks, but not for these five: Cincinnati Financial (CINF), Stonegate Bank (SGBK), Universal Insurance (UVE), Walker & Dunlop (WD) and Fidelity Southern (LION). These financial stocks are benefiting from long-term tailwinds, while everyone else is struggling against major headwinds.
For one, the Federal Reserve is still inching toward a rate hike. But the signals are getting fuzzy, and we all know how much the market hates uncertainty.
Second, news from around the globe is causing the markets to sell off: China and Europe portends more economic weakness in two major economic drivers; and Russia is becoming increasingly belligerent (with its military speaking louder than its diplomacy), sending more troops to the Ukraine border and offering Iran an advanced anti-missile system.
But even in this sea of red, there’s opportunity to be found.
The five aforementioned financials, for instance, should continue to do well. Partly because these are domestic niche-players located in strong sectors of the world’s only expanding economy, and it doesn’t hurt that they make attractive acquisitions for larger institutions, as both the insurance and banking sectors have been consolidating recently.
Truly, cash is king. And these companies have plenty.
Straight-A Financial Stocks: Cincinnati Financial (CINF)
Cincinnati Financial (CINF) is a leading domestic property & casualty insurer. Started in 1950 by four Midwest insurance agents, it’s become one of the top 25 P&C insurers in the U.S., with nearly 6,000 agents and employees, serving 39 states.
Serving both businesses and individuals, CINF has continued to steer a straight path through the markets this year. In late July, CINF thrashed second-quarter earnings expectations by nearly 50%, and recently announced it will be distributing a dividend, which at this point will kick off a solid 3.4% yield.
This from a stock that is up 5% year-to-date as of this writing, and 12% over the past year, even after this week’s carnage.
Mergers and acquisition activity has been picking in the insurance sector this year, even outside the healthcare space. The fact that that CINF has been performing so well is also the reason it’s a potential acquisition play by larger insurers.
Most insurers sit on piles of cash from premiums, so when interest rates begin to rise, the larger insurers go fishing for smaller insurers loaded with cash as an easy way to expand and finance acquisitions.
But even if CINF stands on its own, it’s doing very well in its current markets and will continue thriving.
Straight-A Financial Stocks: Stonegate Bank (SGBK)
Stonegate Bank (SGBK) fits in the newest category of M&A candidates — regional banks. SGBK operates across South Florida, providing its services to individuals as well as to businesses, and Stonegate’s strength continues to be the resurgence in the real estate market in its region.
While it was cratered after the financial collapse in 2008, South Florida has went on to become one of the hottest real estate markets in the U.S. Money from South America (Brazil, Venezuela, Colombia) and Europe has come in recent years and bought up property at bargain prices.
SGBK has focused on the commercial end of the market, which tends to be foreign investment capital in office or residential buildings. And commercial and industrial and commercial real estate each comprised 28% of new loans for Q2, while 18% was in construction and land development.
Stonegate Bank is a thriving business, and is looking increasingly attractive to bigger players searching for exposure in South Florida’s reviving economy.
Straight-A Financial Stocks: Universal Insurance (UVE)
Universal Insurance (UVE) is another Florida-focused firm but this time in the P&C sector, broadening its base to eight other states and represented by 7,000 independent insurance agents.
Yet, UVE’s Florida roots is what has kept the firm growing in this tepid market. The regional strength has been a great benefit, but it’s also helped that there haven’t been any major hurricanes in the past year that would have eaten into its growing pile of cash from premiums.
If an insurer doesn’t have to pay out on claims, it can keep that money invested. Much of that money stays in liquid securities like U.S. Treasury bonds in case UVE needs quick access to cash if there’s a major event.
But this is the attraction of the insurers. If their business is good (as UVE’s is) and rates rise, these companies are sure to make even more money.
Right now, UVE is in the catbird seat: It’s growing its business, beating earnings expectations quarter after quarter, will be a beneficiary of rising rates and is a prime acquisition target.
Straight-A Financial Stocks: Walker & Dunlop (WD)
Walker & Dunlop (WD) is the most compelling growth stock of the group.
Up 64% in the past year and 37% this year, this commercial real estate finance firm knows how to play market cycles. It’s been doing it since 1937.
With offices located around the nation, it is well positioned to take advantage of emerging growth anywhere it pops up.
But the most compelling aspect of WD’s business right now is, as with the banking and insurance sectors, rising interest rates.
Since the company finances new properties and developments, its margins will grow as interest rates rise. So you have the confluence of two major trends — rising interest rates and a strengthening real estate sector — and WD stands to benefit from both.
What’s more, Japanese and European firms are increasingly looking to the U.S. for solid long-term acquisitions since growth in their regions isn’t stable, or even existent for that matter.
WD is a prime candidate for anyone looking to grab a solid company with smart exposure to U.S. commercial real estate.
Straight-A Financial Stocks: Fidelity Southern (LION)
Fidelity Southern (LION) is another Southern gem. LION is a bank that essentially serves individual and commercial clients in the Georgia area. And Atlanta — as the US Conference of Mayors Data suggests — will rank among America’s fastest growing cities over the next 30 years. It’s already been on fire for the past two decades.
So it’s no surprise then that this little bank has been growing in size and profitability along with the city. Its loan portfolio continues to grow and its net income just hit a record in Q2 of this year.
Again, there is a significant track record of growth for LION, having avoided the worst of the financial meltdown and maximizing the advantages of low rates since then. Now, as rates rise, LION is well positioned to post even more impressive growth in quarters to come.
And as real estate makes a comeback and new residents move to Atlanta, LION’s market share will continue to grow. All this also means there will certainly be suitors interested in LION as well.