Nice Niches in Financial Services

03/20/2014 9:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

Despite the reputational and regulatory fallout from the financial crisis, America remains the leader in financial innovation, and small US financial companies can be a lucrative space for investors able to sidestep potential potholes, suggests Richard Moroney in Upside Stocks.

While a handful of companies, once deemed too big to fail, get much of the press, some of the best stories for investors are small players with enviable niches. Below, we review three of our favorite specialty-finance picks.

AmTrust Financial (AFSI)

AmTrust offers worker-compensation insurance to small businesses. Management views this market as less competitive than the broader insurance market, due to its smaller policy size and lower premiums.

The accounting methods for some of its foreign businesses have drawn scrutiny from investors, causing shares to plunge 22% in December. But the stock has bounced 15% since February 13, when AmTrust reported December quarter results. Both per-share profits and revenue exceeded consensus expectations.

The stock trades at 11 times trailing earnings and nine times estimated 2014 earnings. AmTrust, while likely to be volatile, is a Best Buy.

Och-Ziff Capital Management (OZM)

Founded in 1994, Och-Ziff Capital is one of the world’s largest managers of alternative assets. More than half of assets under management involve long-short equity strategies, so stock-picking ability is crucial.

Och-Ziff shares looks like a good pick in their own right, with an Overall rank of 99 and both sector-specific scores above 90.

The fluctuating quarterly dividend returns nearly all of the company’s earnings to shareholders. For US federal income-tax purposes, Och-Ziff's dividend is treated as a partnership distribution. Och-Ziff is a Best Buy.

SS&C Technologies (SSNC)

Although a technology company, SS&C Technologies serves close to 7,000 financial companies scattered around the globe. Its software and outsourcing services help asset-management providers improve efficiency for reporting, accounting, risk management, and other financial processes.

The rebound in the investment-management sector, coupled with tougher regulatory requirements, has driven demand for SS&C products.

The stock is not particularly cheap, trading at 19 times trailing earnings, but its 2014 outlook is solid. SS&C has purchased 38 companies since 1995 and continues to hunt for more acquisition targets. SS&C is a Best Buy.

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