4 Financial Rally Stocks for July

BALTIMORE (Stockpickr) -- Yesterday's rally showed us that despite a market that's moved considerably lower in recent months, investors are willing to bid up stocks that they see as undervalued right now. Even though the market looks to pull back early in today's trading session while Wall Street digests Thursday's forthcoming jobless claims and consumer credit data, the consensus among the pros seems to be that we're due for an upward bounce in the big indices -- which could lead to significant gains for certain sectors.

One of those sectors is financials.

While we've seen vast fundamental improvements in the financial sector, investors continue to be wary of putting their cash into financial stocks -- and understandably so. Financials took the brunt of a severe beating in 2008 thanks to an economic crisis that they contributed to in a large way. At the same time, shareholders found their stakes watered down by dilutive equity issues and bailouts. And in many cases, toxic assets remain on -- and off -- banks' balance sheets.

But not all financial stocks are flawed. In fact, the drag on the financial sector provided some interesting value opportunities for investors who were willing to look past the stigma and buy conservative firms that had strong fundamentals. To some extent, 2010's selloff has put similar opportunities on the table.

Here's a look at four financial rally stocks for July 2010.

Regional banks have been one of the most maligned groups of all. With limited exposure to subprime lending and double-digit profit margins, scores of regional banks make for attractive investments. But BB&T ( BBT) stands out from the crowd. The $19 billion bank operates all over the East Coast, with a particular dominance in the Southeast and mid-Atlantic. And while BB&T's shares have matched the rest of the regional banking industry in 2010 (up 7.8%), this stock could see bigger gains when it announces earnings later this month.

Two factors make BB&T an especially attractive play right now: a conservative balance sheet and strategically smart use of capital. BB&T abstained from taking on excessively risky bets during the housing boom, eschewing potentially lucrative subprime bets in favor of higher-performing loans. That's a decision that kept the company profitable throughout the recession -- in total, operating expenses grew only 1% in the last couple of years, despite the increased cost of nonperforming asset collection that peers were faced with.
Who Owns BB&T?

BB&T is also making smart investments right now. The company bought Colonial Bank after the FDIC was forced to step in and take over the failed company's $22 billion in assets. As a result, BB&T significantly increased its asset base while sharing most of the risk with the FDIC. As we work our way back to historical lending levels, expect that new asset base to contribute significant revenue to BB&T's top line -- and expect dividends to creep back to their historic levels.

Another unique banking play is Northern Trust ( NTRS), a financial firm that specializes in private banking for the wealthy as well as custodial and administrative services for institutional investment firms. On the custodial side, Northern Trust holds more than $4 trillion in institutional dollars, a fairly sticky fee-based revenue stream. High switching costs help guarantee that those fees will continue to hold up barring some sort of significant advantage in the competition's corner.

For Northern Trust's private banking clients, the answer generally comes down to reputation. And Northern Trust's reputation is nearly flawless. The firm provides private banking services for nearly a quarter of the families on the Forbes 400 list, thanks in part to a track record that stretches back to the late 1800s. Because banking for the ultra-wealthy is largely a relationship business, Northern Trust's large client base provides substantial growth opportunities -- particularly in a tough economy where other banks' clients are looking for a fresh perspective.

Despite ample opportunities to diversify its businesses, Northern Trust continues to operate in the same business it's been for more than 100 years -- a profitable business that continues to grow. That singularity of purpose is an attractive attribute for investors in a climate where other firms have unsuccessfully toyed with new, exotic revenue generators.
Who Owns Northern Trust?

Not all of the attractive banks are U.S.-based, however. While there are numerous foreign banks that could make smart investments right now, Australia's Westpac Banking ( WBK) is one of the most attractive if only for its generous dividend. At present, the company's yield sits at 6.29%.

Westpac is one of Australia's biggest retail banks, but that hasn't kept the firm from delivering consistent profits. Thank poor decisions a decade ago for that -- financial problems in the 1990s has kept Westpac's loan portfolio conservative in recent years, and it's fuelled the truly impressive margins the company currently enjoys.

Those margins should help to cement the otherwise unwieldy dividend in place for 2010.

But banks aren't the only attractive financial area right now. Asset manager T. Rowe Price ( TROW), a former employer of mine, has long been a powerhouse player in the retirement planning arena thanks to a conservative, systematic approach to investing; now that approach is sending investors to the Baltimore firm in a big way.

T. Rowe currently manages around $400 billion in client assets, of which nearly 65% were retirement accounts -- a product with high switching costs and respectable margins. Strong mutual fund performance in recent years has helped sway some of that money over to the firm, while innovative approaches to marketable products such as target date funds have helped generate even more inflows.

Ultimately, this asset manager should continue to impress retail and institutional investors who've found themselves disillusioned with their own fund positions - and continue to collect AUM-based fees in the process.
Who Owns T. Rowe Price?

To see these financial plays in action, check out the Financial Rally Stocks for July 2010 Portfolio on Stockpickr.


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At the time of publication, author had no positions in stocks mentioned. Elmerajji was previosuly employed by T. Rowe Price.

Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.

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