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Buyback Bets: 4 Financial Favorites

 January 24, 2013 10:23 AM
 


(By David Fried, editor The Buyback Letter) Our recommendations center on a collection of stocks that we believe, as a group, will outperform the market this month. Our Buyback Premium Portfolio is up 71.17% since inception in 2000 vs. a decline of 1.52% in the S&P 500 over the same time frame.

Here's a look at four stocks we have added to our model portfolio, each operating in the financial sector: American Capital Ltd. (ACAS), SLM Corp. (SLM), Lincoln National (LNC) and Dun & Bradstreet (DNB).

[Related -Is Japan Hinting About Its Own 'Tapering'?]

American Capital

American Capital is a private equity firm and global asset manager investing in private equity and real estate.

Since its August 1997 IPO, American Capital and the funds it manages have invested about $31 billion in more than 540 portfolio companies, in virtually every industry sector. It has 90 investment professionals in 8 offices in the U.S. and Europe.

As a publicly traded company, American Capital offers shareholders an opportunity to invest in privately held middle market companies through ownership of its stock.

[Related -Dun & Bradstreet Corp (DNB): Fundamental Stock Research Analysis]

It is known as a business development company, or BDC. These companies make money by financing small private companies. They mainly invest in debt securities with the goal of generating income, but sometimes they'll also invest in warrants, preferred, and/or equity securities as well.

ACAS has experienced volatility in the last few years, nearly collapsing in the first 2 quarters of 2009 as the economy tanked. The company was able to reverse its decline in the last quarter of 2009, and has been steadily climbing uphill since then. In the last 12 months, management has reduced shares outstanding by 8.4%.

SLM Corp.

SLM, more commonly known as Sallie Mae, is the nation's No. 1 financial services company specializing in education. It originates, acquires, finances, and services private education loans in the U.S.

Sallie Mae provides financial services to hundreds of college campuses as well as to federal and state governments, although it is not sponsored by or an agency of the U.S.

SLM has a market cap of $7.91 billion and is part of the financial services industry. The company has a P/E ratio of eight, below the S&P 500 P/E ratio of 17.7. Shares are up about 28% year to date.

Analysts praise the company for solid stock price performance, an impressive record of earnings per share growth, compelling growth in net income, notable return on equity and attractive valuation levels.

Management has reduced shares outstanding by 9.1% in the last 12 months.

Lincoln National

We last bought Lincoln National in October and sold it a month later for a quick and tidy 3.11% gain. We had previously owned it for 3 months in 2010, and reaped a 15.05% gain from it at that time.

Lincoln is a seller of life instance and annuities and a Fortune 200 American holding company, and has multiple insurance and retirement businesses in the U.S. With headquarters near Philadelphia, it had assets under management of $174 billion as of September 30, 2012.

Lincoln has announced it was hiking its dividend by 50%, to 12 cents a share. Analysts believe the company's strengths can be seen in solid stock price performance, increase in net income, revenue growth, attractive valuation levels and growth in earnings per share.

In the last 12 months, management has reduced shares outstanding by 8.8%.

Dun & Bradstreet

Research and consulting company Dun & Bradstreet is the world's leading source of commercial information and insight on businesses.

Its entire business is built on collecting, aggregating, editing and verifying information from thousands of global sources every day. Its commercial database contains more than 215 million business records.

Over the past few years, the $3.5 billion company has evolved from delivering reports to helping customers increase revenue, identify savings and drive growth and profitability.

It generates large cash flows, successfully dodged "The Great Recession" (because it has a unique asset to which other companies are compelled to pay for access), has recent growth initiatives (with the potential to leverage its vast knowledge of U.S. businesses into revenue from the Asia-Pacific area), and a robust share buyback program.

In the last 12 months, management has reduced shares outstanding by 8.2%.

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