Positive Catalysts for Two Financial Stocks

 | Oct 15, 2013 | 12:30 PM EDT  | Comments
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"Investing right now is like taking a shower knowing Norman Bates is in your house"  -- Political columnist Jim McTague

In Monday's column,  we discussed how difficult it is for investors to put new money to work in a market which is being primarily driven by the daily happenings in Washington. I highlighted a couple of smaller capitalization concerns that should continue to grow at a rapid clip regardless of what the two political parties do.

Another way to beat the market is to find companies which are benefitting from positive catalysts that have not been fully recognized by the market yet. I want to look today at a couple of financial stocks that are either benefitting from improving business fundamentals, or are changing positively their business model.

Genworth Financial (GNW) is one of the largest insurance and financial services holding companies in the United States and has an expanding international presence. It is also one of the leading private providers of mortgage insurance, which almost bankrupted the company during the financial crisis. The company has been on the mend since that near death experience.

Ironically, this mortgage insurance business is now one of the main drivers of Genworth's improving earnings picture. The FHA has raised mortgage insurance fees which have allowed Genworth to gain market share. The company is also benefitting from the exit from bad mortgages and the increase of money in good mortgages, which is happening at impressive rate.

Genworth should also be buoyed by the continuing housing recovery as well as rising interest rates which help insurers' investment returns. Earnings are tracking to a 25% Y/Y gain and analysts expect the same type of increase in FY2014. The stock sells for less than half of its book value and right around 9x forward earnings.

Gramercy Property Trust (GPT) is a small ($275 million market capitalization) real estate trust. Over the last year the company has exited the risky CDO business, hired an institutional quality management team and is transforming the company into an office industrial focused triple net REIT with an asset management arm.

The company has acquired some $380 million in properties with a 9% capitalization rate over the last year and has no meaningful debt maturities for many years. Compass Point recently initiated the shares as a "Buy" and sees more than 40% upside from the current stock price. The analyst firm believes the company will initiate a dividend next year and by 2015 will have a 40 cents-a-share-annual payout, which would be an over 8% yield at the current stock price.

Insiders have been net buyers of the shares over the past few months. This evolving REIT is relatively uncovered on the street and the shares change hands at $4.60 a share. The only other analyst price target on the company is $6 a share.

A good portion of the company's assets are industrial properties like cold storage facilities or truck terminals located in fast growing target markets. These types of mundane logistical assets should throw off consistently rising cash flow, which can be harnessed to reward patient income investors.

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