4 Finance Stocks to Bet on This Earnings - Earnings ESP

Despite persistent pressure on top line, banks remain in good shape in terms of earnings so far on the back of aggressive cost containment measures and lower provision for loan losses. However, the sector participants seem to have lost strength in fourth-quarter 2013 with the alternate measures being less effective to yield desired results so far.

Some of the segments like equity business and commercial lending have no doubt remained strong, thanks to the economic stability that instilled investors' confidence.  However, the rate of growth was not enough to offset the pressure on earnings this quarter.

As the unemployment rate continues to remain over 6.5%, we believe that the Federal Reserve will continue with its stimulus for some more time, which will keep the interest rate low and consequently hurt interest income. Moreover, higher capital requirements and strict vigilance on parallel sources of income for banks will likely keep margins under pressure.

So far, 24.1% of the sector participants have reported fourth-quarter results. Total earnings for the companies have shown an increase of 14.2% over the prior-year quarter. But this impressive growth has been primarily driven by

's (

) stupendous contribution to the sector earnings. Moreover, revenues dropped 1.0%.

Though beat ratios (percentage of companies coming out with positive surprises) for both earnings and revenues were decent at 63.2% and 36.8%, respectively, it was largely due to conservative estimates.

For a detailed look at the earnings outlook for this sector and others, please read our

report.

The scenario might appear dismal, but you can turn the odds in your favor. As a reflection of the weakness in the sector, finance stocks look relatively cheaper now. So selecting a few finance stocks with a huge short-term growth potential should yield a solid return. We have picked a handful of stocks that are slated to report earnings for the quarter ended Dec 31 in the coming days and will likely beat estimates. An earnings beat will raise investors' confidence in these stocks, leading to rapid price appreciation.

Choosing the most profit-yielding stocks in the finance sector could be quite tricky unless one narrows down the list. One way of doing so is by selecting stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Zacks

.

Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, chances of a positive earnings surprise are as high as 70%.

Here are 4 finance stocks that have the right combination of elements to deliver an earnings beat when they release their earnings in the next couple of days:

(

) is a Zacks Rank #2 stock with an earnings ESP of +0.90%. The Zacks Consensus Estimate for fourth-quarter 2013 is $1.11 per share.

Headquartered in Santa Clara, California, SVB Financial Group is a diversified financial services company. It is also a bank holding and financial holding company. The company through its primary subsidiary, Silicon Valley Bank, and various other subsidiaries as well as divisions provides a wide range of banking and financial products and services.

The company has registered an average positive earnings surprise of 10.46% over the trailing 12 months.

SVB Financial is scheduled to announce fourth-quarter and full-year 2013 results after the market closes on Jan 23.

(

) carries a Zacks Rank #2 and has an earnings ESP of +2.50%. The Zacks Consensus Estimate for the upcoming quarter is 40 cents per share.

Based in Los Angeles, California, Cathay General Bancorp is the one-bank holding company for Cathay Bank. Cathay Bank offers various commercial banking products and services for individuals, professionals, and small to medium-sized businesses.

The company is scheduled to report fourth-quarter and full-year 2013 results after the market closes on Jan 23.

(

) has a Zacks Rank #3 and an earnings ESP of +42.86%. The Zacks Consensus Estimate for the fourth quarter is 21 cents per share.

Toms River, New Jersey-based OceanFirst Financial operates as a holding company for OceanFirst Bank. OceanFirst Bank offers community banking services to retail, government, and business customers.

OceanFirst Financial is expected to announce fourth-quarter and full-year 2013 results after the market closes on Jan 23.

(

) has a Zacks Rank #3 and an earnings ESP of +2.20%. The Zacks Consensus Estimate for the upcoming quarter is 91 cents per share.

This Houston, Texas-based company operates as the holding company for Prosperity Bank. Prosperity Bank offers a range of financial products and services to small and medium-sized businesses and consumers.

Prosperity Bancshares is expected to announce fourth-quarter and full-year 2013 results before the opening bell on Jan 24.

We anticipate a slightly better scenario in 2014. Though the long term interest rates may not increase considerably in the first half of the year, we expect an improvement in the later half with the Fed's confidence on the economic growth. Moreover, as the economic security revives, banks are expected to draw down their reserves that were hoarded for meeting legal expenses. Therefore, we expect increased as well as efficient capital deployment activities in the form of share repurchases, mergers and acquisitions as well as dividend payouts in the finance sector. So finance sector certainly looks attractive from a long-term investment perspective.

At present, we observe that the growth process is sluggish and low interest rates have significantly compressed profitability. Nevertheless, we have to be patient as we are headed towards a more stable economy with a strong and safe financial backdrop.