The way I see it, investors in the finance sector have a choice: Risk stagnant profits with Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), and National Australia Bank Ltd. (ASX: NAB), or look a little further afield for opportunity.
A couple of rapidly growing finance stocks are still trading at knock-down prices despite their performance – but probably not for long.
Instead of taking on the big four, consider owning shares in these smaller, but high-quality businesses:
Collection House Limited (ASX: CLH) operates in the receivables management and collections business and has a stellar record of growing profits each year.
In fact revenue, profits, and dividends have risen every year since 2007, with the exception of 2009 when revenue and dividends still rose, but profits dipped 1%.
After a strong first half report, Collection House looks likely to continue that record into 2015. Importantly, great performance in recent years – times of very low bad debts – shows the defensive nature of its earnings and also provides a hint at how things might swing to the upside when interest rates and bad debts rise.
Based on its earnings forecast for 2015, Collection House is trading on a Price to Earnings multiple of ~13.5 – cheaper than the banks ~15 – and offers a 3.8% fully franked dividend.
I personally feel that Collection House is a strong contender for 'best stock on the ASX', but whether you agree with that or not there's no denying that CLH and competitor Credit Corp Group Limited (ASX: CCP) have a lot of merits that can't be overlooked.
Another stock I would consider buying right now is Yellow Brick Road Holdings Ltd (ASX: YBR), which is an emerging non-bank lender and financial services company headed by well-known financial guru Mark Bouris.
The most recently quarterly update showed Yellow Brick Road's second ever underlying cash surplus (excluding integration, acquisition, and underwriter payments), and the company looks to be on track to deliver legitimate profits before too much longer.
Importantly Yellow Brick Road's growth is driven by outstanding products, with its financial services among the best in their class. YBR joint-venture Smarter Money Investments recently 'achieved a 5 star Morningstar rating upon completing its 3 year performance track record… driven by appearing in the top decile of performers in its peer group every year since inception' (emphasis added).
Appearing in the top 10% is pretty good, and if the company can continue to perform I expect cash profits are just the start. Yellow Brick Road is a small-cap company though, and as it is not posting profits, nor does it pay a dividend.
It's also worth noting that despite being a non-bank lender, Macquarie Group Ltd (ASX: MQG) is a significant shareholder, with an estimated 19% of the company.
Despite the worry over interest rates and the future of bank profits, there are still plenty of ways to grow your wealth in the finance sector.
