NEW YORK (TheStreet) -- Financial stocks have dropped 10% since the August market volatility, despite target prices "barely" moving as a result of Chinese growth concerns, according to analysts from BMO Capital Markets.

As a result, portfolio managers can either "lower net exposure (because we cannot rationalize current volatility) or buy the dip (because upside potential has increased). For U.S. large-cap banks and specialty finance stocks, we recommend the latter: buy this dip," the Sept. 15 note said. BMO Capital Markets is a division of Bank of Montreal (BMO - Get Report) .

"Across the U.S. financial system, fundamental credit quality should continue to improve over the next year and flatten out thereafter, while bank capital strength remains more than adequate. Therefore, we use the Value versus Growth analysts to generate investment ideas among financial stocks," the note said.

Here are BMO Capital Markets' top financial services stock picks for the rest of the year paired with ratings from TheStreet Ratings for additional perspective.

TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

MA Chart MA data by YCharts

1. MasterCard (MA - Get Report)
YTD Return: 6.9%
BMO Capital Markets Price Target: $128
BMO Capital Markets Said:
We recommend buying MasterCard as a long-term investment idea for investors capable of holding positions for at least two years.

Key to our bullish long-term thesis is MA's growing capacity to return capital to shareholders. We believe MA could surprise positively with respect to the magnitude of share repurchases announced over the next two years, driven by strong growth in what we refer to as "excess" free cash flow.

Global payments networks offer the best long-term secular growth opportunity among North American financial stocks, in our view, as global financial transactions continue to migrate from cash/check form onto electronic platforms.

MA shares have fallen recently, due in part to investor concern regarding exposure to emerging markets; however, MA's growth has remained robust, with volume growth of more than 15% (constant - currency basis) throughout the emerging markets (as reported in 2Q15), and we remain more excited about growth in electronic payments in emerging markets (where penetration is low) than in developed markets (where penetration is high).

TheStreet Said: TheStreet Ratings team rates MASTERCARD INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate MASTERCARD INC (MA) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, good cash flow from operations and growth in earnings per share. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results. "

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 21.7%. Since the same quarter one year prior, revenues slightly increased by 0.9%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • MA's debt-to-equity ratio is very low at 0.23 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.24, which illustrates the ability to avoid short-term cash problems.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. When compared to other companies in the IT Services industry and the overall market, MASTERCARD INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • Net operating cash flow has increased to $821.00 million or 12.62% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -2.01%.
  • MASTERCARD INC's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, MASTERCARD INC increased its bottom line by earning $3.09 versus $2.57 in the prior year. This year, the market expects an improvement in earnings ($3.36 versus $3.09).
  • You can view the full analysis from the report here: MA
COF Chart COF data by YCharts


2. Capital One Financial (COF - Get Report)
YTD Return: -7.5%
BMO Capital Markets Price Target: $111
BMO Capital Markets Said:
We also recommend buying Capital One as a long-term investment idea for investors capable of holding positions for at least two years.

Capital One looks like a regional bank, but it trades as if it were still a specialty monoline credit card lender (regional banks tend to trade on a 12-14x forward earnings, while specialty finance stocks average 8-10x multiples).

Investor concerns have focused on COF's growth-driven credit costs (higher-than-expected asset growth has led to higher provisions) and declining efficiency guidance (from continued investment in the development of COF's digital banking platform); however, we remain focused on and excited by the re-rating potential for COF shares over the next two years.

TheStreet Said: TheStreet Ratings team rates CAPITAL ONE FINANCIAL CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate CAPITAL ONE FINANCIAL CORP (COF) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and good cash flow from operations. We feel its strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 12.7%. Since the same quarter one year prior, revenues slightly increased by 3.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.98, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels.
  • Net operating cash flow has increased to $2,355.00 million or 33.73% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 23.03%.
  • CAPITAL ONE FINANCIAL CORP's earnings per share declined by 28.1% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, CAPITAL ONE FINANCIAL CORP increased its bottom line by earning $7.59 versus $7.27 in the prior year. For the next year, the market is expecting a contraction of 5.7% in earnings ($7.16 versus $7.59).
  • The share price of CAPITAL ONE FINANCIAL CORP is down 6.60% when compared to where it was trading one year earlier. This reflects both (a) the trend in the overall market as well as (b) the sharp decline in the company's earnings per share. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
  • You can view the full analysis from the report here: COF

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C Chart C data by YCharts

3. Citigroup (C - Get Report)
YTD Return: -3.9%
BMO Capital Markets Price Target: $65
BMO Capital Markets Said:
We recommend buying Citigroup as a catalyst trade idea for short-term, event-driven investors with high risk tolerance.

We believe that earnings announcements in the coming quarters will demonstrate rapid growth in C's regulatory capital ratios, from lower legal charges and higher (subsequent) consumption of deferred tax assets (DTAs).

Following the recent market volatility inspired by China's economic slowdown, investors have been concerned about C's exposure to emerging markets. We are more sanguine. Emerging markets account for 16% of C's total assets and only 13% excluding Mexico. If the value of emerging market banks that are economically adjacent to China falls by, say, 20%, we would expect a consequent decline of only 2-3% in the value of C shares; instead, C shares have fallen by 15% recently. On the basis of this (admittedly simplistic) analysis, we believe the impact of emerging market concerns on the value of C shares has been exaggerated.

TheStreet Said: TheStreet Ratings team rates CITIGROUP INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate CITIGROUP INC (C) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, attractive valuation levels, expanding profit margins, good cash flow from operations and impressive record of earnings per share growth. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results. "

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Commercial Banks industry. The net income increased by 2562.6% when compared to the same quarter one year prior, rising from $182.00 million to $4,846.00 million.
  • 42.63% is the gross profit margin for CITIGROUP INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 21.51% is above that of the industry average.
  • Net operating cash flow has significantly increased by 707.80% to $16,253.00 million when compared to the same quarter last year. Despite an increase in cash flow of 707.80%, CITIGROUP INC is still growing at a significantly lower rate than the industry average of 2563.10%.
  • CITIGROUP INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, CITIGROUP INC reported lower earnings of $2.19 versus $4.25 in the prior year. This year, the market expects an improvement in earnings ($5.63 versus $2.19).
  • You can view the full analysis from the report here: C

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SC Chart SC data by YCharts

4. Santander Consumer USA (SC - Get Report)
YTD Return: 11.5%
BMO Capital Markets Price Target: $35
BMO Capital Markets Said:
We recommend buying Santander Consumer USA (SC, also known as "SCUSA") as a catalyst trade idea for short-term, event-driven investors with high risk tolerance.

Our bullish investment thesis on SC has not change, despite recent share price volatility; we continue to believe that the market misunderstands the short-cycled nature of subprime auto lending.

With rising credit costs and regulatory scrutiny fresh in their memories, we believe that investors might be positively surprised by the impending development of SC earnings from higher-than-expected origination volumes, higher margins and better credit performance. We forecast core EPS growth of +19%YOY in 2015E, followed by +6%YOY in both 2016E and 2017E.

TheStreet Said: TheStreet Ratings team rates SANTANDER CONSUMER USA HLDGS as a Sell with a ratings score of E+. TheStreet Ratings Team has this to say about their recommendation:

"We rate SANTANDER CONSUMER USA HLDGS (SC) a SELL. This is based on several weak investment measures, which should drive this stock to significantly underperform the majority of stocks that we rate. The company's weaknesses can be seen in multiple areas, such as its generally high debt management risk and weak operating cash flow. "

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The debt-to-equity ratio is very high at 7.21 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company.
  • Net operating cash flow has decreased to $598.06 million or 43.44% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • 47.89% is the gross profit margin for SANTANDER CONSUMER USA HLDGS which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 15.08% trails the industry average.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. When compared to other companies in the Consumer Finance industry and the overall market, SANTANDER CONSUMER USA HLDGS's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • You can view the full analysis from the report here: SC

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LEAF Chart LEAF data by YCharts

5. Springleaf Holdings Inc. (LEAF - Get Report)
YTD Return: 27%
BMO Capital Markets Price Target: $58
BMO Capital Markets Said:
We added Springleaf (LEAF) to our list of best event-driven trade ideas. We upgrade LEAF from a Market Perform to an Outperform rating, and we recommend buying the stock to short-term event-driven investors with high risk tolerance.

We upgrade LEAF and add it to our list of best event-driven trade ideas because we believe that at LEAF's current value, investor risk is asymmetrically biased to the upside; indeed, upside potential (+25%) is 1.3x downside potential (-19%).

At only 43%, we believe that the probability of deal closure (of OneMain Financial from Citigroup) is underestimated by the market because we think competition among consumer lenders occurs nationally rather than locally (e.g. borrowers consulting the Internet to price loans), and we respect the due diligence carried out by both SpringLeaf and Citigroup prior to announcing a timetable for their proposed deal.

TheStreet Said: TheStreet Ratings team rates SPRINGLEAF HOLDINGS INC as a Sell with a ratings score of D-. TheStreet Ratings Team has this to say about their recommendation:

"We rate SPRINGLEAF HOLDINGS INC (LEAF) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, generally high debt management risk, weak operating cash flow and feeble growth in its earnings per share. "

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Consumer Finance industry. The net income has significantly decreased by 116.6% when compared to the same quarter one year ago, falling from $72.39 million to -$12.00 million.
  • The debt-to-equity ratio is very high at 3.23 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company.
  • Net operating cash flow has significantly decreased to $20.00 million or 75.70% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • SPRINGLEAF HOLDINGS INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, SPRINGLEAF HOLDINGS INC turned its bottom line around by earning $4.37 versus -$0.18 in the prior year. For the next year, the market is expecting a contraction of 50.8% in earnings ($2.15 versus $4.37).
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. When compared to other companies in the Consumer Finance industry and the overall market, SPRINGLEAF HOLDINGS INC's return on equity is below that of both the industry average and the S&P 500.
  • You can view the full analysis from the report here: LEAF

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