Skylands Capital’s Top Finance Stock Picks As Rate Hike Looms

The odds of a Federal Reserve rate hike in 2015 have increased quite significantly after its two-day policy meeting earlier this week. Over the past few days, investors have been piling up call options across the banking sector, betting on a rate hike this December, which points to the fact that most market participants have great expectations on the finance sector. Theoretically, financial stocks might turn out to be the biggest gainers after the Fed decides to increase interest rates. The logic is quite simple: banks will most likely generate more money as soon as a rate hike occurs, given that the interest rate spread between loans and deposits will broaden. Having this in mind, we will discuss the top financial stock picks of Charles Paquelet’s Skylands Capital LLC at the end of the third quarter. The Milwaukee-based investment firm takes into account macroeconomic indicators and their impact on certain companies and industries when assessing potential investment opportunities, so it is highly likely that the investment team at this firm considers the soon-to-be disclosed finance stocks as the high-potential stocks within the finance industry.

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We don’t just track the latest moves of hedge funds. We are, in fact, more interested in their 13F filings, which we use to determine the top 15 small-cap stocks held by the funds we track. We gather and share this information based on 16 years of research which showed that these 15 most popular small-cap picks have a great potential to outperform the market, beating the S&P 500 Total Return Index by nearly one percentage point per month in backtests, and easily beating the most popular large-cap picks of funds, which nonetheless get the majority of their collective capital. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic only the very best ideas of the best fund managers on your own? Since the beginning of forward testing in August 2012, the Insider Monkey small-cap strategy has outperformed the market every year, returning 102%, nearly 2.1 times greater returns than the S&P 500 during the same period (see more details).

#4 Capitol Federal Financial Inc. (NASDAQ:CFFN)

Shares Owned by Skylands Capital (as of September 30): 112,900 shares

Value of Holding (as of September 30): $1.37 million

Skylands Capital reduced its position in Capitol Federal Financial Inc. (NASDAQ:CFFN) by a mere 1,100 shares during the third quarter. The holding company for Capitol Federal Savings Bank became a fully publicly-traded company back in 2010 through a public offering that raised $1.2 billion. The bank has returned a substantial portion of this capital to its shareholders through buyback programs and dividends over the five years since. The shares of the bank are slightly more than 2% in the green year-to-date, while the company’s long-term investors are also set to receive a cash true-up dividend of $0.25 per share for fiscal 2015 besides the stock price appreciation. Ken Fisher’s Fisher Asset Management increased its holdings in Capitol Federal Financial Inc. (NASDAQ:CFFN) by nearly 164,000 shares during the latest quarter to 2.25 million shares.

#3 McGraw Hill Financial Inc. (NYSE:MHFI)

Shares Owned by Skylands Capital (as of September 30): 21,600

Value of Holding (as of September 30): $1.87 million

Skylands Capital put more faith in McGraw Hill Financial Inc. (NYSE:MHFI) during the September quarter, as it increased its stake in the company by 7,550 shares. The financial intelligence company had an ugly third quarter in terms of stock performance, with its shares losing nearly 14% during the three-month period. However, the stock has recovered since the beginning of the current quarter and is up by 8% thus far. Just a few hours ago, the company announced the possibility of selling off its J.D. Power unit, which is widely-known for its car quality and reliability ratings. This business unit is anticipated to generate revenues of up to $350 million in 2016. Stephen Mandel’s Lone Pine Capital owned 3.63 million shares of McGraw Hill Financial Inc. (NYSE:MHFI) as of June 30.

Skylands Capital’s top two finance picks are disclosed on the next page.

#2 Raymond James Financial Inc. (NYSE:RJF)

Shares Owned by Skylands Capital (as of September 30): 42,000

Value of Holding (as of September 30): $2.08 million

Raymond James Financial Inc. (NYSE:RJF) represents the second-largest finance-related position of Skylands Capital at the end of the third quarter. The Milwaukee-based investment firm reduced its stake in the company by 500 shares during the latest quarter. Just recently, the financial services company reported its financial results for its fiscal year 2015 that ended September 30, posting net revenue of $5.2 billion, which was up by 7% year-over-year. The company’s net income came in at $502.1 million, compared with $480.2 million posted in fiscal year 2014. It has been rumored of late that Raymond James intends to acquire the private client brokerage of Deutsche Bank AG. Ken Griffin’s Citadel Investment Group owned nearly 854,000 shares of Raymond James Financial Inc. (NYSE:RJF) at the end of June.

#1 JPMorgan Chase & Co. (NYSE:JPM)

Shares Owned by Skylands Capital (as of September 30): 145,450 shares

Value of Holding (as of September 30): $8.87 million

JPMorgan Chase & Co. (NYSE:JPM) is among the top 20 overall holdings of Skylands Capital at the end of the third quarter, and represents its largest finance-related position. Even so, Skylands reduced its holding in the bank by 11,250 shares during the turbulent quarter. The shares of JPMorgan are currently trading at a trailing P/E ratio of 11.11, significantly below the median of over 22 for the S&P 500. The stock is not only trading at attractive levels at the moment, but it also offers an annualized dividend of $1.76 per share of common stock. This denotes an annualized dividend yield of 2.7%. Even more to that, the stock has delivered a year-to-date return of more than 3%, so JPMorgan appears to be a safe finance sector bet for the upcoming months. Edgar Wachenheim’s Greenhaven Associates owns 9 million shares of JPMorgan Chase & Co. (NYSE:JPM) as of September 30.

Disclosure: None