If you have money in the financial sector of the market you are probably doing well so far this year. The performance of the sector has been notable up to this point, discreetly outpacing the market in general. Mind you there are still risks here, but the sector’s fundamentals and broader macroeconomic developments tend to offset any of the risks involved. In addition, the Fed has been very accommodating in providing financial institutions with low borrowing rates on money that they can, in turn, lend out at higher interest rates. Although the spread is not large, the opportunity for margin expansion made possible by long-term, slightly higher interest rates anchored by the Fed, is a real likelihood. Balance sheets of consumers and companies appear to be improving with corporate cash balances on the rise and consumer debt falling exponentially. This has made it possible for financial corporations to reduce the reserves on their balance sheets for loan losses. The continued lift in the housing sector will also help financials to improve their positions as mortgage demand is rising.
A major concern for the sector is the current regulatory environment. There are regulations in place that limit trade that financial institutions can do for themselves. In addition, new capital requirements limit the amount of money that banks can lend. Both of these issues curb profit potential for many companies. In fact, confidence in the sector remains shaky because of concerns about increased government regulations. Investors would do well to watch for a push by the Fed to increase lending to higher risk borrowers that could pose problems for the sector. In addition, government intervention in the form of new limits on certain fees that can be charged could hold back performance for the foreseeable future.
Having said all of that, which way should an investor go? There are many financial companies from micro-cap to large-cap that are sound investment opportunities. Companies such as JPMorgan (NYSE: JPM) and Goldman Sachs (NYSE: GS) are big plays in the sector. They are a nice security blanket for investment purposes. Slower growing giants such as these offer a virtual guaranteed return on investment; albeit at a reduced rate of speed. They are long-term favorites that seem to be able to weather the vagaries of an often finicky market.
Goldman Sachs is a heavy hitter in the sector. The company is major global investment banking, securities and investment management firm that offers a range of financial services to a significant and highly diversified client base. Corporations, financial institutions, governments and high-net-worth individuals deal with Goldman’s on a regular basis. Goldman Sachs operates in four segments: Institutional Client Services, Investment Banking, Investment Management, and Investing and Lending. The company has offices in over 30 countries, including all the major financial centers in the world. GS has a current market cap of $75 billion and trades at around $163.00 per share. The company is currently outperforming the S&P 500 and the Dow and looks to be a nice large-cap investment for the long-term. Although some analysts are neutral on performance for the rest of the year, the stock has garnered a buy rating from the majority of analysts who cover it.
JPMorgan Chase & Co., another power player in the industry, reached a new 52-week high, hitting $54.96 in the first hour of the trading session on May 22, 2013. The closing price provided a concrete year-to-date return of 20.8%. The trading volume for the session was 46.71 million shares, significantly higher than the average 24.60 million shares over the last 3 months. This news bodes well for investors because despite the strong appreciation, the stock has plenty of upside left. Analysts are projecting a 9.19% growth for 2013 based on exceptionally strong revisions over the past 60 days. The primary growth drivers for the company included a much unexpected surprise of a15.2% earnings. JPM has a market cap of $207 billion and is flirting with its 52-week high.
On the opposite end of the spectrum, micro-caps such as Omega Commercial Finance Corporation (OTCQB: OCFN) (www.omegapublic.com) are riskier plays, but well worth the risk if you manage to chose the right company. Shares are thinly traded for these smaller companies on the OTC market, boosting the volatility of the stock. Also lack of liquidity may make it difficult to buy or sell the play on demand. The bottom line is that investors should be wary of OTC listed stocks because regulatory standards are not as stringent and these trades can be easily manipulated. That is not to say that you should not invest in reputable OTC companies. Omega is a sound play in this market. It’s just a matter of doing a bit of research.
Omega Commercial Finance Corporation is a publicly traded financial services holding company. It has access up to $150 million in assets under management through its interest in VFG Securities and VFG Advisors. Their principal companies operate in the commercial real estate, finance, and capital markets sector. They provide short and medium-term fixed loans to borrowers seeking to refinance or acquire office, retail, industrial, multifamily, or hospitality property types. In short an emphasis on loans secured by commercial real estate. Omega Commercial Finance Corporation is based in Miami, Florida.
Currently the company has free trading shares available to them. In the event they sell these shares through a Direct Public Offering (DPO) filed in an S-1 registration. OCFN will use the proceeds from the DPO sales to support Omega Capital Street and Omega CRE Group's Small Balance Loan Program and for future acquisition targets consisting of privately held and operating commercial mortgage banking-firms. For, example DPO shares could be utilized by Omega Capital Street for a loan in their pipeline seeking $500,000 to refinance a retail property that is 100% occupied with loan characteristics such as low LTV and high DSCR; that could bring immediate cash flow through Interest Income and Origination Fees which could drastically change its fundamentals. OCFN has current market cap of $11.8 million. Management is sound and solidly committed to growth through acquisition.
Whatever your investment style, the ability of the financial sector to adapt chameleon-like to the ever changing market environment lends itself to closer scrutiny by investors.
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