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9 Consumer Finance Stock Plays From eBay to Capital One

Stocks in this article: BAC EBAY AXP COF DFS MA ADS SLM V WXS

NEW YORK ( TheStreet) -- The consumer credit space is rapidly evolving, with all major players working to grow their international business and also jump on the mobile payments bandwagon.

KBW analyst Sanjay Sakhrani rates eBay (EBAY) -- whose PayPal subsidiary in August signed a landmark deal with card lender and payment processor Discover Financial Services (DFS) -- and eight other companies "Outperform," and on Friday said that third-quarter "earnings season looks to be solid for the companies within our coverage universe," as "operating indicators such as credit quality and volume trends still remain relatively positive and resilient."

Sakhrani said that KBW continues "to maintain an overweight bias in our ratings for most companies we follow in the sector," because of the good operating climate and because "valuations remain attractive relative to other financials."

With several of the stocks seeing very strong price performance, investor fears of a 2013 recession with the " fiscal cliff" looming, continued uncertainty in Europe and slowing growth in China, it's not unreasonable to expect a fourth-quarter dip for some of these names, but Sakhrani said that "industry growth trends and current portfolio dynamics of card issuers (i.e., cleaner and stronger core group of customers following the recession and better cardholder payment behavior) help to lessen any potential impact" of an economic slowdown.

"In terms of the potential effects of a Fiscal Cliff specifically," he said that "the associated implications (i.e., higher tax rate and dividend tax rate, etc.) are less of an impact for the cards/payments space (with possibly the exception of American Express (AXP) ) given these changes mainly effect the higher income side of the consumer demographic and the companies are generally not high-dividend-yielding stocks to begin with as share repurchases are the preferred avenue of returning capital to shareholders."

In the aftermath of the credit crisis, investors with short-term horizons have been tempted -- and in some cases made a lot of money, if their timing was right -- by heavily discounted banking names, including Bank of America (BAC), whose shares were trading for roughly half their book value at the beginning of 2012, and now trade for roughly 0.7 times tangible book value, despite rising 62% through Thursday's close at $8.97.

But Bank of America still faces major uncertainty, with mortgage putback demands rising 41% during the second quarter alone, to $22.7 billion, as of June 30, and although it is profitable, the company's earnings are relatively week, with an operating return on average assets (ROA) of just 0.52% for the 12-month period ended June 30, and a return on average equity (ROA) of 4.84%.

In another development related to the company's two large acquisitions in 2008, Bank of America on Friday announced a $2.43 billion settlement of a class action lawsuit related to its purchase of Merrill Lynch.

While the consumer finance plays trade at much higher multiples to book value -- and to earnings estimates, for that matter -- you get what you pay for, and names like Discover and American Express consistently achieve ROE well in excess of 20%.

The following are the nine consumer finance companies rated "Outperform" by Sakhrani, with third-quarter earnings previews or commentary on Discover, which has already reported its fiscal 2013 results. The names are sorted by ascending upside potential implied by KBW's price targets:

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