This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Financial Funds Come Bouncing Back

A relatively steady choice is Hennessy Small Cap Financial. Portfolio manager David Ellison can hold cash when markets collapse. A big cash stake helped him limit losses in the financial crisis. During the past 15 years, the fund returned 7.8% annually, ranking as the top performer in the category.

A Hennessy holding is Flagstar Bancorp (FBC), a Michigan institution that was saddled with nonperforming loans during the financial crisis. Ellison says the balance sheet is improving as housing markets recover. The stock sells for around $19, a cheap price for a company that should earn $4 a share in the next year, Ellison says.

Another holding is Encore Capital (ECPG), a debt collector. Ellison says the company buys unpaid debts from credit card operators, often paying 3 cents on the dollar.

Encore aims to earn healthy profits by contacting debtors and collecting 5 cents on the dollar or more. Ellison says that he has owned the stock a number of times over the years. He likes to buy when the shares are depressed because the economy is weak and borrowers are struggling to pay debts. He aims to hold as unemployment falls, and collection rates improve.

Akre Focus can hold stocks of all sectors, but the fund currently has 46% of assets in financials. Portfolio manager Chuck Akre looks for companies that can deliver high returns on equity for years. He aims to buy when the shares sell at modest prices. His high-quality strategy has been working lately. During the past three years, the fund returned 16.6% annually, outdoing 95% of competitors in the mid-cap growth category.

A holding is MasterCard (MA), which has rich profit margins of more than 30%. The company charges banks fees for facilitating transactions at millions of locations around the world. Because of its dominant position, MasterCard can continue increasing profits, says Akre.

"The economic characteristics of the business are almost without peer," he says.

Another holding is Moody's (MCO), the credit rater. The company's reputation suffered in the financial crisis when many top-rated mortgage securities collapsed. But Moody's maintains its dominant position, supplying ratings for issuers who want to sell bonds.

Akre says that many investors will not buy bonds without ratings. He says that Moody's should continue enjoying solid growth.

"The world will need to raise an increasing amount of debt," he says.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,039.48 -40.09 -0.23%
S&P 500 1,995.65 -1.09 -0.05%
NASDAQ 4,556.5810 -1.1140 -0.02%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs