Under the Radar: 3 Financial Stocks to Watch

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NEW YORK (TheStreet) -- Financial stocks are investor favorites. But frankly, I'm tired of hearing about JPMorgan Chase(JPM) and Goldman Sachs(GS). Here's a fleet of smaller, niche-focused companies that offer superior return potential and less risk. Our stock-rating model has rated each stock "buy."

A REIT with meat: Annaly Capital Management(NLY) is a real estate investment trust whose portfolio includes collateralized mortgage obligations, pass-through certificates and callable debentures. The company's shares have fallen 12% since February 2008 as subprime mania dragged down the market.

Annaly generated first-quarter earnings of $350 million after a year-earlier loss despite a 10% drop in revenue. The company extended its gains in the second quarter, posting a $350 million profit and a net margin of 48%.

Like most REITs, Annaly takes on more debt than firms in other industries, which is evident in its debt-to-equity ratio of 6. The trust invests in mortgage-backed securities with actual or implied AAA ratings, minimizing credit risk. The company leverages its bets to generate above-average returns.

The REIT distributes profits through dividends, rewarding investors with a lofty 14% yield. Mortgage-backed securities have become cheap as investors avoid real estate and banks purge their balance sheets of assets they deem risky. Annaly is seizing the opportunity to borrow at low rates and buy depressed securities.

Annaly's big downside is its affordability. The stock has surged 22% in the past three months, lifting its price-to-earnings ratio to 20. But the high dividend yield compensates for the expensive price. Investors looking for income should consider this B-plus-rated stock.