Read the headlines on pretty much any day of the week and you're bound to get more than your fill of news about financial companies. Whether it's Citigroup, Goldman Sachs
The flood of news from this group of financial companies may also be drowning out other companies in the industry that are more worthy of your investment dollars. Goldman Sachs may be opaque and highly dependent on trading results and Citi may be ... well, Citi is just a mess, but I've dug up five financial services companies that may be worth a hard look even as the industry continues to live under a storm cloud.
1. SEI Investments
Don't be surprised if this is a new name for you, because SEI Investments tends to stick to the background. Though this Motley Fool Stock Advisor recommendation does have an investment management business, its primary source of revenue is the services it provides to banks, investment advisors, and money managers.
SEI helps financial services companies manage the quagmire of regulations and paperwork that they have to deal with. This also means that SEI hasn't leveraged itself to kingdom come in hopes of turning small returns into something more impressive. In fact, its $400 million-plus in cash and near lack of debt make its 18% trailing return on equity all the more impressive.
The use of options may still not be all that common among retail investors, but it's growing -- and growing fast. While optionsXpress is a full-on online broker like E*Trade, the company focuses a great deal on options trading in an effort to provide the best education, tools, and executions for its options-loving customers.
optionsXpress has been affected by the financial meltdown in a variety of ways, including lower trading by its clients and lower interest income due to rock-bottom interest rates. The strength of the company's model, however, has shone through as it continues to add tens of thousands of new accounts, and customer assets have declined a good deal less than market indices. This options aficionado also sports over $200 million in cash on its balance sheet with no debt, giving it a fantastic cushion against tough times.
3. NYSE Euronext
Let's get this out of the way up front -- yes, NYSE Euronext
Seeing the electronic writing on the wall, NYSE picked up Archipelago, an electronic exchange which formed the basis for NYSE Arca. Taking a further stab at growth and diversification, it took the plunge to purchase Euronext, which gave it a hefty European footprint and one of the largest derivatives businesses in the world.
With roughly $3 billion in debt against $1 billion in cash and investments, NYSE is by no means debt-free. However, the company's highly recurring revenue has helped keep its operating income well above its interest payments. Currently shares are changing hands at under 12 times analysts' 2009 earnings expectations, and it's paying a 5.6% dividend. Are you licking your chops yet?
When you think of merger-and-acquisition advising -- that is, if you think about mergers and acquisitions -- it's likely that Goldman Sachs and Morgan Stanley
But don't overlook Lazard. Run by M&A legend Bruce Wasserstein, this $2 billion advisor plays with the big boys and wins. For the first quarter of this year, the company completed $58 billion in global M&A work and announced nearly $42 billion. The company also has a diversified money management business that accounted for almost 40% of 2008 revenue. Better still, you get this package with a balance sheet not nearly as scary as one of the giant brokers'.
I will point out that there are other great independent M&A advisory firms such as Greenhill and Evercore, but I'm giving Lazard the nod because its advisory business is a bit better, it has steady revenue coming from its asset management business, and it's trading at a discount to the other two.
To many, Markel
The comparison isn't perfect by any means. Berkshire Hathaway was a textile company that was taken over by Warren Buffett and today gets much of its income through insurance operations. Markel, meanwhile, is an insurance company through and through -- an insurer of niche property and casualty risks, to be exact.
The comparison does hold up when it comes to investing, though. Buffett is acclaimed for taking the cash spit out by Berkshire's operating businesses, as well its insurance companies' float, and making a mint reinvesting it. Markel's Tom Gaynor has had considerable success of his own investing Markel's float. For the 10 years ending in 2008, Markel's equity portfolio returned an average of 3.6% per year, while the S&P index fell by almost a quarter.
Like most insurers, Markel trades off of book value and normally fetches a multiple close to two. Recently it has been trading closer to 1.25 and had actually dipped below book value in early March.
Avoiding the finance crapshoot
The stocks of the companies above may not be the best-performing financial stocks out there. If it turns out that the balance sheets of Citigroup and Bank of America
The companies above are what I see as sound companies within the financial industry that will leverage strong balance sheets to get through the financial turmoil and be bigger, stronger, more valuable businesses five years from now. And if you're wondering why Berkshire Hathaway didn't make the cut -- it did, but heck, do you really need another reason to buy Berkshire?
Further financial Foolishness:
Berkshire Hathaway, Nasdaq OMX Group, and Markel are Motley Fool Inside Value recommendations. Berkshire Hathaway is also a Motley Fool Stock Advisor selection, as is SEI Investments and optionsXpress Holdings. NYSE Euronext is a Motley Fool Rule Breakers selection.
The Fool owns shares of Berkshire Hathaway, Markel, and Nasdaq OMX. Try any of our Foolish newsletters today, free for 30 days.
Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, optionsXpress, and Bank of America, but does not own shares of any of the other companies mentioned. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants.