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5 Stocks That Dodged the Reform Bullet

The financial-reform bill isn't what Wall Street had feared most, as Congress watered down provisions to ensure its passage. Many implications of the changes are clear, and a lucky few have dodged a bullet. TheStreet examines five stocks that offer an attractive bet in the post-reform world.

1. Discover Financial and other credit-card issuers were in the crosshairs of the financial-reform bill because of interchange fees, or so-called swipe fees. The fees are collected by card networks and banks as a percentage of retail transactions.

An amendment to the reform bill authored by Sen. Richard Durbin (D-Ill.) limits the fees charged on debit transactions, leaving the interchange fees for credit cards unaffected and — for now — safe from regulation.

Year-To-Date Performance: -0.2%

Valuation: As this chart shows, Discover offers investors value on a price-to-book and price-to-sales basis when compared to its consumer-finance peers. It appears expensive on a forward price-to-earnings basis.

Consensus: Of 21 analysts covering Discover Financial, 11 have "buy" ratings on the stock, including RBC Capital Markets, FBR Capital Markets and Jefferies. Only two analysts recommend selling the stock, while another eight suggest that investors hold the shares. The average of 15 stock-price targets is $17.90, 22% higher than the current price.

2. Nasdaq OMX Group may benefit from the financial-reform bill, thanks to over-the-counter (OTC) derivatives legislation. The exchange and its competitors will cash in on clearing derivatives, with the total for clearing non-exempt, standardized OTC derivatives at $100 million to $200 million next year and $400 million in 2012, according to Keefe Bruyette & Woods analysts.

The firm says the final reform bill "will be a potential positive for interdealer brokers and exchange revenue." Nasdaq OMX Group hopes its clearing services for interest-rate swaps will be operational on a full scale by mid-2011, Nasdaq OMX Stockholm President Erik Thedeen told Dow Jones Newswires last week.

Year-To-Date Performance: -4%

Valuation: Nasdaq OMX is cheap compared with the investment-services peer group, as this chart shows.

Consensus: Twenty-two researchers follow the Nasdaq exchange's stock, and none advise selling the shares. Fourteen firms, including Jefferies, BMO Capital Markets and Raymond James, say investors should buy the stock. The average price target of 16 analysts is $24.62, representing an upside of almost 30%.

3. Bank of New York Mellon and its asset-management business avoided tough legislation thanks to Sen. Scott Brown (R-Mass.), who helped negotiate a relaxed Volcker Rule to allow banks to invest up to 3% of their Tier 1 capital in hedge funds or private equity. Initially, the Volcker Rule would have prevented firms from speculating with their own money. Bank of New York Mellon and rival custody bank State Street lobbied against the proposed rule.

Year-To-Date Performance: -6.6%

Valuation: Bank of New York Mellon is inexpensive relative to the asset-management peer group, as this chart displays. Most notably, the stock trades near its book value of $24.47 for a price-to-book ratio of only 1.05.

Consensus: Of the 24 analysts who follow Bank of New York Mellon, 15 advise buying the stock. Those firms include Edward Jones and Rochdale Securities. Nine others suggest holding the stock. No firm recommends selling the shares. Fifteen firms have an average price target of $34.33, 32% higher than today.

4. MasterCard, like Discover Financial and Visa, escaped tougher legislation with the Durbin amendment. It was feared that regulation would erode interchange, or swipe, fees. The compromise has already helped MasterCard shares rebound from some of May's 19% drop. While the Federal Reserve will now set limits on interchange fees, that applies only to fees set by banks and not by the credit-card networks themselves, a major victory for MasterCard and Visa.

Year-To-Date Performance: -16.4%

Valuation: Compared to the consumer-financial peer group, MasterCard doesn't offer investors much value. As this chart shows, the stock is expensive on a forward price-to-earnings, price-to-book and price-to-sales ratio.

Consensus: Researchers view MasterCard favorably, with 34 analysts, or 91.9% of those covering the stock, recommending it as a "buy." They include Sanford C. Bernstein, Lazard Capital Markets and SunTrust Robinson Humphrey. Two other analysts say investors should hold the shares, while only one analyst advises selling them. The average of 27 price targets is $290.19, representing a potential gain of 36%.

5. Zions Bancorp and other regional banks won't feel the same pinch of the new legislation as most major U.S. banks from the restrictions on proprietary trading and capital requirements. Pres. Obama is calling for a 10-year, $90 billion tax on the liabilities of banks with more than $50 billion in assets. Currently, Zions Bancorp has total assets of $51 billion, and D.A. Davidson analyst Chris Stulpin expects that number to drop below $50 billion by the end of the third quarter. In the past month, Zions has announced an equity distribution, conversion of warrants and preferred stock issuance, although Stulpin calls the capital-raising efforts "prudent" and says they "have limited near-term dilution to common shareholders."

Year-To-Date Performance: 84.1%

Valuation: Zions Bancorp shares trade 12% below the book value of $26.89. More notably, Zions offers a sharp discount on a price-to-free-cash-flow basis, as this chart illustrates.

Consensus: FBR Capital Markets and D.A. Davidson are two of nine research firms that say investors should buy shares of Zions Bancorp. Another 14 analysts say investors should hold them, while six advise selling them. The average of 21 price targets is $26.29, 11% higher than the stock's value.

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Disclosures:

Disclosure information was not available for Holmes or his company.

Disclaimer