If you were to ask me what factors my “ideal” stock pick has, I’d probably propose five criteria: 1) The company has to have growth. 2) The shares should be cheap on an absolute and relative basis. 3) I’d look for shares that weren’t over-extended (near their 50-day line). 4) I’d want a stock that’s not particularly liquid (to amplify price movement to the upside). And, lastly, I’d want 5) lots of positive momentum behind the shares.
Normally, because I focus on micro-cap stocks, I can find companies that check all these boxes simply because I have thousands of stocks, in many different industries to choose from.
But, in a bear market, my job gets a little bit tougher.
Today, boxes #1 through #4 are easy (especially #2!).
But #5 is the doozy.
It’s tough to find positive momentum stocks in a bear market. We have momentum but in the wrong direction.
But one sector has been an exception of late: financials. And today, I want to highlight three micro-cap financials with all five factors mentioned above.
3 Small-Time Financial Stocks to Buy
Small-Time Financial #1: Currency Exchange International Corp (CURN)
Currency Exchange (CURN) specializes in selling foreign banknotes through their retail and wholesale channels while also offering payments solutions to integrated banking customers.
The company is benefitting from the post-pandemic travel boom yet only trades for little more than the net cash on its balance sheet.
Currency Exchange reported strong results recently with both Banknotes (+103%) and Payments (+127%) performing very well.
Importantly, management noted that it expects a strong summer travel season which should drive (my opinion) record results.
Other positives:
- Expanding margins
- High insider ownership
- A highly valuable hidden asset (payments business).
The stock looks very cheap.
Small-Time Financial #2: Esquire Financial (ESQ)
Esquire (ESQ) is a cool little company. It is a niche bank focused on lawyers and the litigation industry. Due to its specialty and expertise, it has been able to grow very well. Lawyers are low credit risk, and consequently losses have been minimal.
The company has historically grown earnings at over 20% per year but trades at just 11x forward earnings.
Recent Q2 results were excellent with 37% EPS growth, a ROA of 2.0% and a ROE of 17.8%. Loan losses remain minimal.
CEO Andrew Sagliocca summed it the business well when he said, “There is tremendous growth potential in both our national platforms due to the limited number of participants and the fragmented approach to finance and technology in both markets.”
Small-Time Financial #3: NexPoint Diversified REIT (NXDT)
NexPoint (NXDT) recently transitioned from a closed end fund to a real estate investment trust (REIT). This transition puts the stock on the radar of many more investors (both professional and retail).
The stock trades at a 40% discount to the value of its underlying assets, and the CEO is a proven value creator who owns more than 25% of shares outstanding and has been aggressively buying on the open market.
The company has scheduled an update call during which management will share its strategy for the company going forward. The value creation strategy could include:
- Buybacks,
- An increased dividend,
- Spin-offs.
Regardless of what is disclosed, any more transparency will be a plus, and I expect the call to be a positive catalyst for the stock.
A near-term re-rate to NAV could drive 50%+ upside, but longer term, a bigger opportunity could materialize as the REIT is repositioned to capture value.
So those are my three favorite micro-cap financials that you can buy today. If you want to know what other micro-cap stocks I’m currently recommending, you can subscribe to my Cabot Micro-Cap Insider advisory – and gain access to my entire micro-cap stock portfolio – by clicking here.
Do you own any micro-cap stocks or financial stocks – or both? Tell us about them in the comments below.