Bank of America/Merrill Lynch's top financial stock pick added to this updateBOSTON ( 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.
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."
Aon Corp. ( AON) Company Profile: Aon is a provider of risk-management services, insurance and reinsurance brokerage and human capital and management consulting. In July 2010, the company announced a merger with Hewitt Associates, an HR consulting and outsourcing company. Share Price: $46.30 (Dec. 6) 2011 Return: 0.7% Investment Thesis: William Blair analysts see several catalysts for Aon Corp. in 2012, the most notable of which is the merger with Hewitt, which should reap rewards next year. The analysts forecast a 100-basis-point improvement in pretax margin for 2012 and a 250-basis-point improvement for 2013. "The margin in the brokerage segment has finally begun showing progress," the analysts write. "With forecast organic growth remaining solid (our estimate is 3% for 2012), the segment should be able to secure additional margin expansion for the next few years. We forecast 40 basis points of pretax margin improvement during 2012 and 2013." Additionally, William Blair expects Aon's free cash flow growth to remain robust and their forecast assumes 30 million of share repurchases over the next two years, which they argue could be a conservative number if the cash flow from the merger with Hewitt. accelerates into 2012.
Higher One Holdings ( ONE) Company Profile: Higher One offers integrated financial aid disbursement services for universities. The company provides services to about 5.8 million students, ensuring they receive financial aid refunds quickly, can pay tuition and bills online, make on-campus and community purchases. Share Price: $19.99 (Dec. 6) 2011 Return: -1.2% Investment Thesis: William Blair analysts say they like Higher One because the company has an attractive, predictable business model with high incremental margins and solid cash flow conversion. It also helps that management recently said that the company's pipeline "remains extremely robust." "We believe there could be upside down the road from the company increasingly being viewed as a true bank alternative (e.g., more direct deposit), through acquisitions, by monetizing the graduate opportunity, and as a takeover candidate," the analysts write. However, there is high short interest in Higher One's stock -- William Blair analysts say it would take about 30 days to cover. That's due to a number of unresolved headwinds, including competition, fees, potential cuts in Pell grants, slowing enrollment growth in the U.S. and a bank partner. While finding a bank partner is the biggest question market, William Blair analysts say that a positive announcement, which could come in the next three months, would be a huge catalyst, especially considering the massive short interest.
Crawford & Co. ( CRD.B) Company Profile: Crawford & Co. is the world's largest independent provider of claims management solutions to insurance companies and self-insured entities. Share Price: $5.87 (Dec. 6) 2011 Return: 72.7% Investment Thesis: William Blair analysts argue that Crawford "is a classic example of an underutilized marquee franchise." "Jeffrey Bowman, CEO since 2008, has a track record of success at the company, turning the international