The Dark Horses Of Specialty Finance

By Gregory S. Davis | July 31, 2008 AAA

Investors fixated on finding an entry point into financials should dig deep for names most probably don't hear about or research. My search began with the Royce Financial Services Fund (RYFSX). The Financial Service Fund from Royce, a subsidiary of Legg Mason (NYSE:LM), is small with only $8 million under management, but its year to date performance of -10% makes it worthy of attention. Given that many other financial focused funds are down -20% or more, a review of the top performers in RYFSX makes it clear that investors do not have to hold large capitalization stocks like Wachovia (NYSE:WB) or Bank of America (NYSE:BAC) to invest in financials.

Here are three stocks worth a look:

Stock YTD Return
(July 29, 2008)
Westwood Holdings Group
(NYSE:WHG)
38%
Watson Wyatt Worldwide
(NYSE:WW)
25%
Stifel Financial
(NYSE:SF)
26%


Westwood Holdings Group
Texas-based Westwood Holdings Group is an institutional money manager with over $7.5 billion in assets under management. Westwood manages assets for pension funds and endowments foundations in addition to providing sub-advisory services to mutual funds. For the first six months of the year, revenue increased nearly 23% to $18.8 million over the same period a year ago. Westwood revenue was driven by fees generated on additional assets from new and existing clients. Westwood is a small cap stock with a market capitalization of $329 million.

Watson Wyatt Worldwide
Virginia-based Watson Wyatt Worldwide is a human capital and financial management consulting firm. For the first three months of 2008 revenue increased nearly 16% to $457 million over the same period a year ago. The increase in revenue was led by increases in segment revenue from its Benefit Group, Investment Consulting Group, and its Human Capital Group. With a market capitalization of $2.4 billion Watson could be considered a mid-cap stock, although it is a member of the S&P 600 Small Cap Index.

Stifel Financial
Missouri-based Stifel Financial is a regional brokerage and investment banking firm. Stifel's revenue increased 34% for the first quarter of the year to $211 due in part to the acquisition of regional brokerage house Ryan Beck. Revenue during the quarter was also driven by commissions and principal transactions from its Private Client, Equity Capital Markets and Fixed Income Markets segments. (To learn how to decipher a finance company's complex earnings statement, read Analyzing A Bank's Financial Statements.)

Final Thoughts
Familiar financials are likely to have several more months of volatility to sort through their credit woes. I'm not against investing in what's tried and true in terms of the big name financials, but given the current economic cycle it may be time to consider a few new names.

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