TheStreet.com 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 total return performance.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.
Boutique is the new bulge: Broadpoint Gleacher Securities Group ( BPSG) blends a boutique investment bank with a securities trading firm. The company formed earlier this year when Broadpoint bought Gleacher Partners, an advisory firm founded by mergers-and-acquisitions legend Eric Gleacher in 1990. The new entity generated a huge quarterly profit. Second-quarter revenue surged 178% to $92.7 million, helped by demand for debt trading and restructuring advice. Broadpoint is expanding its presence in sales and trading, capitalizing on the void left by Lehman Brothers and Bear Stearns. Its quarterly operating margin climbed from 5% to 24% and the net margin rose from negative territory to 16%. Broadpoint has a conservative capital structure relative to peers, with a debt-to-equity ratio of 0.2. In contrast, JPMorgan, Goldman Sachs and Morgan Stanley ( MS) all have debt-to-equity ratios over 1. Broadpoint's Descap group is now one of Wall Street's largest players in mortgage-backed securities, collateralized loan obligations and collateralized debt obligations. These so-called toxic assets have become a public relations nightmare for banks mired in the Troubled Asset Relief Program, allowing Broadpoint to scoop up business. Second-quarter Descap revenue more than tripled to $38 million. Revenue from its debt capital markets unit climbed 159% to $36 million. Broadpoint's expanded slate of services should help the company grow, boosting its shares. Even though Broadpoint's shares aren't cheap at a price-to-earnings ratio of 25, it's the best bet among boutique investment banks. Small-cap competitors like Cowen Group ( COWN), Greenhill ( GHL), Jefferies Group ( JEF) and Piper Jaffray ( PJC) offer inferior investments. Trading opportunities: Knight Capital Group ( NITE) specializes in trading over-the-counter securities and pink sheets. Its focus on low-priced stocks puts it in a potentially profitable position. As institutional money comes off the sidelines, investors will target stocks they consider cheap. Over-the-counter stocks, or OTCs, have limited research coverage, which will help them attract capital.
Second-quarter revenue increased 65% to $313 million. Net income rose 21% to $36 million and earnings per share jumped 41% to 52 cents, helped by a lower share count. The operating margin dropped from 31% to 26% and the net margin fell from 16% to 11%. The company's U.S. equity share volume jumped 36% in June and the number of trades rose 96% from the year-earlier period. This is an impressive feat in light of the summer, a low-trading season, and investors' risk aversion. There is reason to believe the third-quarter will be lucrative for Knight. The company's strong performance despite light equity trading suggests that the best quarters are on the horizon. Knight has improved its fixed-income offerings by poaching talent from larger peers and is strengthening its presence in Europe and Asia-Pacific. We give Knight a financial strength score of 7.9 out of 10, higher than the average for companies we rate "buy." Its shares are trading at a 68% discount to its peers, and we expect the company to expand its market share into next year. -- Reported by Jake Lynch in Boston.