Re-Evaulating the Financials

 | Sep 20, 2013 | 3:00 PM EDT
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Investors are still adjusting to the Federal Reserve's decision Wednesday not to taper its monthly $85 billion worth of bond buying. Gold and silver have had huge runs as this decision has rippled across commodities and individual stock sectors.

The financial sector will be affected in different ways by Fed chief Ben Bernanke's choice to keep easy money flowing, at least for now. The comments Stephanie Link made Thursday on CNBC were on the money, saying that regional banks have become less attractive now that their interest spreads have been reduced. I ditched my remaining holdings in Huntington Bancshares (HBAN) for a nice profit after the Fed's decision.

Reduced rates should also be a negative for insurers as they will get reduced performance from their investment portfolios. I also agree that investment banks like Goldman Sachs (GS) still have value.

I still like the mortgage servicers as I don't believe rates will fall enough to trigger a huge increase in refinancing activity, so they should not see that much increased churn in their portfolios. In addition, the long-term tailwinds provided by Dodd-Frank remain firmly in place. Wells Fargo (WFC) is reportedly shopping $41 billion in servicing rights as it does not want to hold the increased capital required if it keeps the rights.

I still hold Ocwen Financial (OCN) in this space, but I would not be adding to this play at these levels. The stock has run up some 40% since I profiled it in July. The other servicer profiled in that article, Walter Investment Management (WAC), has risen approximately 25% over the last three months but is still cheap at less than 6x forward earnings.

Nationstar Mortgage (NSM) is another mortgage servicer that has generated several positive comments from analysts recently. Jefferies upgraded the shares to a Buy and upped its price target to $64 a share from $40. Oppenheimer also initiated the shares as a Buy earlier in the month. Despite these positive outlooks, I am avoiding the shares due to accounting concerns that Doug Kass detailed extensively in August.

The pullback in yields is also good for mortgage real estate investment trusts. My favorite play in this sector continues to be RAIT Financial Trust (RAS). I doubled my position recently after the shares sold off during the sharp rise in interest rates and it should do well with that rise arrested for now by the Federal Reserve's inaction.

The shares yield more than 8% and the company just raised its quarterly payout by 15%. The shares are cheap at around 5x this year's earnings and insiders have been net buyers of the stock this year. The stock is also selling at less than book value and around 40% under the median analyst price target of $10 a share. Finally, unlike other firms in this space, it receives fees for owning and managing some of its properties, which diversifies and stabilizes its earnings streams.

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