These Are the Top 7 Buys in Financial Services

As an investor, it doesn't pay to follow the crowd.

In this series, though, we highlight a possible exception -- the collective wisdom of our CAPS community. Read the next section if you're unfamiliar with our methodology. Skip it if you want to go straight to the results.

Why this crowd is different
Jumping into a stock because your rich neighbor did, or because you heard about it from your friend's uncle who used to work on Wall Street, or because CNBC has been talking about it nonstop is a recipe for disaster.

If there's one thing I've learned as a stock analyst, it's that any stock can be gussied up to sound like a world-beater. If there's a second thing I've learned, it's that being a smart person doesn't make you a good investor.

In the hands of a smart person with good communication skills, the never-were and never-will-be stocks sound like tickets to instant fortune. The ancient Greek philosophers made the distinction between rhetoric and knowledge. The former is convincing; the latter is true.

That's why we factor in track record in our Motley Fool CAPS community. We invite everyone to give stocks an outperform (i.e., a "buy") or underperform rating (i.e., a "sell") in CAPS. We then use those opinions to calculate a rating for each stock -- from one to five stars (five being the best). But -- and this is a big distinction -- we give more weight to the opinions of folks whose picks have performed well in the past.

The top 7 buys in financial services
So, with that methodology as prelude, I present to you the top seven stocks that are involved in the financial services industry based on the number of CAPS members who have rated the stock an outperform. Note that in CAPS, banks are their own industry category outside of financial services. Only stocks garnering a four- or five-star rating are included. 

Company

Market Capitalization (in millions)

Outperform Picks

CAPS Rating (out of 5)

E*TRADE (Nasdaq: ETFC  )

$3,083

   2,762

****

First Marblehead (NYSE: FMD  )

$231

   2,657

****

NYSE Euronext (NYSE: NYX  )

$7,718

   2,383

*****

American Capital (NYSE: ACAS  )

$1,705

   1,953

****

CapitalSource (NYSE: CSE  )

$1,687

   1,949

****

Brookfield Asset Management (NYSE: BAM  )

$14,337

   1,194

*****

optionsXpress Holdings (Nasdaq: OXPS  )

$915

   1,142

*****

Source: Motley Fool CAPS as of Aug. 12, 2010.

More CAPS members think E*TRADE is a buy than any other four- or five-star financial services player. Do you think another stock belongs in the top seven? Or that a different stock deserves to be the No. 1 buy? Make your thoughts known in CAPS by clicking here. Or just go there to do further research on one of these popular stocks.

Anand Chokkavelu doesn't own shares in any company mentioned. NYSE Euronext is a Motley Fool Rule Breakers pick. optionsXpress Holdings is a Stock Advisor recommendation. Brookfield Asset Management is a Global Gains pick. The Fool owns shares of CapitalSource. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 14, 2010, at 8:55 PM, BearishKW wrote:

    ACAS currently trades at 1/3 of it's book value and at a P/E of 2. There are reasons stocks trade this low, and with American Capital in particular those reasons are a very large amount of debt and bond-holders who are not on board and want to file for bankruptcy.

    But in this pickers market, it pays to be a detective. The debt has been successfully restructured, and the fundamental statements have changed from chatostrophic ("going concern") to optimistic ("earnings/share"). ACAS has also liquidated some of it's portfolio and now sits on a cash position that equals it's debt. Any serious bankruptcy threat can be squelched by writing a check.

    Interest rates staying low, and big banks not lending to small businesses means better margins for ACAS. There has never been a better time to be a venture capitalist.

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