Market Overview

Big Bang With Small Bank Stocks

Big Bang With Small Bank Stocks

Under siege for most of the past several years, the financial services sector has finally shown legitimate signs of life in 2012. The second-largest sector weight in the S&P 500, though still controversial, has been a stellar year-to-date performer. Just look at the Financial Services Select SPDR (NYSE: XLF).

That ETF is home to a plethora of well-known (and infamous) banking names including J.P. Morgan Chase (NYSE: JPM), Wells Fargo (NYSEL WFC) and Bank of America (NYSE: BAC). XLF has managed to gain 19 percent this year and the gains would likely be higher if not for an adverse reaction to the presidential election by banking names.

With healthy gains already notched by the largest financial services names, investors may be left wondering if the sector offers any remaining near-term upside. That question cannot be answered definitively, but what is clear is that some small- and micro-cap financial services do offer growth potential along with appealing dividend yields.

Medallion Financial (Nasdaq: TAXI) Medallion Financial is one of the more well-known stocks in the micro-cap universe if for no other reason than that the company has been around for almost two decades and because engages in originating, acquiring, and servicing loans that finance taxicab medallions. Basically, if you want be a cab driver in New York and need a loan to purchase the medallion, Medallion Financial helps you with that, so this is not your run-of-the-mill financial services company.

This may not be the type of company investors usually think of as being a strong dividend payer, but the reality is Medallion Financial has increased its dividend by a third since late 2010 and the payout has quadrupled since 2003. Medallion now yields about 7.4 percent, but beware of this name if it drops below its 200-day moving average. The shares reside just 5.5 percent above that important line.

CapLease Inc. (NYSE: LSE) CapLease is a real estate investment trust (REIT), so it's not surprising this company has a juicy 5.8 percent yield. By law, REITs are required to distribute at least 90 percent of their taxable income each year to shareholders as dividends. The company did cut its payout during the financial crisis, but it has increased the dividend in the past year.

Approximately 90 percent of CapLease's assets are owned single-tenant properties and while the company operates in just 24 states, the company does count the U.S. government, TJMax (NYSE: TJX) and Tiffany (NYSE: TIF) among its tenants.

Last year, CapLease sold $240 Million of debt investments and reduced its debt portfolio 74 percent. Portfolio leverage was reduced to 66 percent. The risk investors must acknowledge with CapLease or any other REIT is that Congress could move to change the tax treatment of certain dividend asset classes, such as MLPs or REITs, in an effort to bolster tax revenue.

A change to the corporate structure of REIT would likely send investors scurrying out of an asset class that has been a favored destination in this low interest rate environment. To be sure, there is no guarantee Congress will force REITs into a traditional corporate tax structure. It is merely an issue investors to keep on their radar screens.

Artio Global Investors (NYSE: ART) Asset manager Artio is easily the most controversial name on this list. Maybe it is because the company had $16.7 billion in assets under management at the end of October compared with $17.7 billion at the end of September. Or maybe it is because the stock trades for less than $2. Or maybe investors have not warmed to management changes that took place earlier this year.

Artio started paying its dividend in 2010 and currently yields 4.4 percent, but the company's payout ratio is just 18%, indicating there is room for dividend growth and that the firm is not being overwhelmed by its dividend. Consider this stock a deep value play because the shares trade for less than 0.8 times book value and less than eight times cash flow.

**The screening methodology used for this included the following parameters: Only stocks that currently reside in the micro-cap universe, yields above 3%, financial services stocks excluding closed-end funds and average daily volume of at least 50,000 shares.


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