William Blair's 7 Favorite Financial Stocks for 2012

Bank of America/Merrill Lynch's top financial stock pick added to this update

BOSTON (TheStreet) -- William Blair's financial stock picks for 2011 were a disaster, trailing the broader market by a wide margin, as the industry suffocated under tighter regulations and lower interest rates.

But the Chicago-based investment bank, which manages more than $45 billion in assets, is looking to recover in 2012 with financial stocks like MasterCard (MA), which has soared 66% this year, and Aon Corp. (AON), up 13%.

William Blair every year offers the top stock picks from individual sectors. In 2011, the firm's selections in the financial sector had the worst performance, falling 25% from Nov. 26, 2010, through Nov. 25, 2011. That compares to a slide of 18.7% on the S&P 500 Financials Index.

William Blair analysts last year highlighted five stocks in the financial sector, four of which were big losers. Morgan Stanley (MS) and Och-Ziff Capital Management (OZM) each dropped 46%, Evercore Partners (EVR) slumped 22%, and Affiliated Managers (AMG) fell 8%. Only IntercontinentalExchange (ICE) made investors money.

Given the dismal performance in the financial sector over the past year, why should investors come back to William Blair for more? For one, the firm is looking more closely at financial technology and specialty finance, which is much different than the big, beleaguered banks.

"Leading financial-services providers to the 2.5 billion underbanked consumers as well as the growing number of unhappily banked consumers should drive strong growth," William Blair analyst Adam Klauber wrote in a research note Tuesday. "New technologies and services such as online lending and prepaid cards are examples."

William Blair isn't the only investment banking firm out with a list of favorite financial stocks. Earlier this week, Bank of America/Merrill Lynch analysts posted their top stock picks for 2012, selecting Lincoln National (LNC) as the best stock idea from the financial sector.

Klauber and William Blair's team of financial analysts see opportunities in other names, saying companies with high barriers to entry, long-term secular growth, international exposure, and visible operating leverage should remain core holdings for investors. The analysts have selected seven financial stocks that they're banking on in 2012, which are outlined below and on the following pages.

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Visa (V)

Company Profile: Visa is the global credit card company.

Share Price: $95.69 (Dec. 6)

2011 Return: 36%

Investment Thesis: "Visa is well-positioned to continue to capitalize on the electronic payments secular growth trend," William Blair analysts write of Visa, noting that secular growth of electronic payments is expected to average 10% to 12% globally over the next several years.

The analysts also say that Visa also enjoys very high incremental margins, which contributes to the company's attractive margin profile (59% in fiscal 2011) and strong free cash flow.

"Visa has a strong balance sheet and generates strong cash flow," the analysts write. "Visa had about $4.1 billion of cash and investments, $2.9 billion of litigation reserves, and no debt on its balance sheet as of Sept. 30, 2011. Guidance calls for more than $4 billion of free cash flow in fiscal 2012."

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