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Two Niche Financial Services Winners

10/26/2010 11:28 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of High Income Alert and Turnaround Trader, finds a credit-card issuer and a private investment firm he thinks will post strong numbers in upcoming quarters.

Capital One Financial (NYSE: COF), the most profitable US credit-card issuer last year, rallied after beating estimates of third-quarter profits. Its net income advanced to $803 million, or $1.76 a share, up from $394 million, or 87 cents, from the same quarter a year ago. (Stock analysts were predicting only $1.20 a share.)

What made the difference? “Strong third-quarter revenues, credit results, and profits continue to demonstrate our resilience in the face of ongoing economic and regulatory uncertainty,” declared Capital One chief executive officer Richard D. Fairbank.

“Continued improvement in credit-loss and delinquency performance in the portfolio was the primary driver of the third-quarter allowance release,” he stated. US credit-card delinquencies actually declined as consumers reduced debt balances.

Capital One was able to release $624 million from an account to cover future loan write-offs. This latest report suggests that Capital One will move higher. Keep buying. (The stock closed above $38 Monday—Editor.) 

Based in New York City, Prospect Capital (Nasdaq: PSEC) is a venture capital and private equity firm specializing in everything from buyouts to bridge transactions to recapitalizations. It is a publicly traded, dividend-focused investment company.

The firm invests across all industry sectors, but its real specialty is the energy and industrial sectors. Most of its current portfolio is invested in oil and gas production, raw materials, pipelines, storage, power generation, oilfield services, and utilities.

Major equity and debt holdings currently include Adapco, Gas Solutions, Advanced Rig Services, Miller Petroleum (Nasdaq: MILL), Aircraft Fasteners International, Biotronic, and Peerless Manufacturing.

I expect Prospect to earn $1.20 a share this year—and considerably more next year. Other financial metrics also look good. Revenue is rising. Debt is negligible. Operating margins top 64%. And you can’t help noticing a current yield here of 12.1%.

Plus, in the last six months, corporate insiders have purchased more than 229,000 shares. There have been zero insider sales. This is a very positive indicator. I expect good news when this venture capital firm reports quarterly results on November 8th.

So, pick up Prospect Capital today. And place a protective stop at $8. If you prefer to play this one more aggressively, try the February 2011 $10 calls. The options currently are trading at [around 50 cents, and the stock closed just above $10 Monday—Editor].

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