Under-the-Radar Financial Stocks for Today

Knight Capital and Stifel Financial are benefiting from wider trading spreads and a surge in trading revenue.
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"Under-the-Radar Stocks" is a daily feature that uncovers little-known companies worthy of investors' consideration. Check in at 5 every morning to find out about stocks that tend to beat their bigger brethren.

Boutique is the new bulge.

JPMorgan

(JPM) - Get Report

,

Goldman Sachs

(GS) - Get Report

,

Wells Fargo

(WFC) - Get Report

and

Bank of America

(BAC) - Get Report

probably will be restrained by new regulations cracking down on everything from securities risk to bankers' pay.

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Knight Capital

(NITE)

and

Stifel Financial

(SF) - Get Report

, on the other hand, are benefiting from wider trading spreads and a surge in trading revenue. The capital-markets companies are rated "buy" from TheStreet.com Ratings.

Business is booming, as the stock market came to life almost three months ago. Institutional investors are still sitting on trillions of dollars, foreshadowing a trickle that will turn into a flood. And, yet, Knight Capital and Stifel Financial remain undervalued. The Russell 1000 Financial Services Index has surged 78% from its March 6 low, and these two sleepers are waiting for their own rally.

Jersey City, N.J.-based Knight Capital is in the business of market-making. Last year, it was the largest U.S. trader in so-called pink sheets and OTC Bulletin Board securities, home to smaller companies. As investors anticipated earnings reports from the biggest banks, such as

Citigroup

(C) - Get Report

and Bank of America, Knight Capital posted an impressive first quarter, increasing revenue 27% to $245 million. Earnings per share declined 13% to 35 cents, hurt by the divestiture of an asset-management division. Daily trading volume and total trades rose in March, April and May from a year earlier.

Knight Capital's focus on low-priced stocks is ideal, given that even behemoths like

General Electric

(GE) - Get Report

and

General Motors

(GM) - Get Report

have traded in the single digits. Knight Capital is trading at a price-to-earnings ratio of 8.7, making it 64% cheaper than its average peer in the investment banking and brokerage industry. The shares are also cheap on the basis of sales, book value and cash flow. The stock has risen 6% this year.

Stifel Financial, based in St. Louis, offers an equally compelling story, but not as much value. The company's first-quarter revenue climbed only 2.3% to $222 million, but fixed-income revenue jumped 33% to $58.4 million, and higher commissions and principal transaction revenue increased 13% to $172 million. Earnings per share declined 18% to 44 cents.

There are signs of optimism for the second quarter as trading revenue and deal volume rebound. The company recently hired 134 investment bankers, traders, institutional salespeople and mortgage bankers, adding revenue-producing talent to its staff amid a sea of Wall Street layoffs. TheStreet.com Ratings upgraded Stifel Financial to "buy" on April 2.

The company is trading at an earnings multiple of 22.3, 8% cheaper than the average peer in the investment banking and brokerage industry. But the stock looks even cheaper when compared with JPMorgan, Wells Fargo and Goldman Sachs, which are all trading at P/E ratios of more than 30. Stifel Financial's shares have declined 6% this year.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.