Three Bank Stocks With More Reward, Less Risk

BOSTON (TheStreet) -- Earnings reports last week from Bank of America(BAC Quote), Citigroup(C Quote) and JPMorgan(JPM Quote) revealed that the banks' main business -- lending -- was still saturated with risk.

Financial-services companies that don't deal in loans and mortgages have fared better. TheStreet.com's "Under the Radar" series has picked some lesser-known winners, including investment bank Stifel Financial(SF Quote), up 30% since our June 1 article, and Broadpoint Gleacher(BPSG Quote), up 38% since our Aug. 3 story.

Here are three overlooked financials due for a boost. Each receives a financial-strength score of 7 or higher, matching the "buy"-list average, but is cheaper than its peer group, offering investors more profit per dollar invested.

Pittsburgh-based Federated Investors(FII Quote) is an investment manager that sells mutual funds and separately managed accounts. The company has $402 billion in assets under management, making it one of the country's largest money managers.

Federated's second-quarter net income fell 9% to $53 million and earnings per share dropped 4% to 52 cents, cushioned by a lower share count. Revenue slipped 1% to $307 million. Federated's gross margin shrank from 32% to 30%, and its operating margin decreased from 30% to 29%.

Federated is 57% cheaper than asset-management peers based on trailing earnings and 22% cheaper based on projected earnings. The shares have rallied 53% this year, outpacing major U.S. indices. The stock pays a 3.6% dividend yield, with a safe payout ratio of 49%. Federated reports third-quarter results after the close of the stock market Oct. 22.

Knight Capital(NITE Quote) is a Jersey City, New Jersey-based capital-markets firm that specializes in thinly traded securities such as OTC Bulletin Board stocks. The company is enjoying steady improvement in trading volume, based on share volume and dollar value.