Forget financials, payment stocks could be your best way to play the space

Financials are lagging the market after falling nearly 10 percent from highs, while banks have tumbled 14 percent.

Mark Newton, president of Newton Advisors, is long-term bullish on financials but sees recent weakness as a reason for caution.

"I still believe that financials are trending higher, but we're really within a downtrend that began at the beginning of the year. So unfortunately even with rates moving higher the group has been under a lot of pressure, and you've really had to be a lot more selective," Newton said on CNBC's "Trading Nation" on Wednesday.

Newton says avoiding regional brokers and other sector stocks that have been badly beaten and finding financials-adjacent picks in the tech space could be a sensible move.

"Visa is my pick in terms of within the whole financial space. Visa and Mastercard both look very attractive. I think those continue to do well," he said.

Visa and Mastercard have both rallied this year. Visa is up 27 percent this year, and Mastercard has added 37 percent, while the XLK technology ETF to which they both belong has added 11 percent. The XLF financials ETF has dropped 2 percent.

Stacey Gilbert, head of derivative strategy at Susquehanna, says she is not a buyer of the financials sector given the headwinds that are anathema to banks: weak loan growth and a flattening yield spread.

However, she does have one financials pick that she believes could weather any troubles facing the sector.

"It would be KeyCorp," Gilbert said on "Trading Nation" on Wednesday. "Relative to peers, it does have loan growth, and that's one of the things that we think is obviously incredibly important for a bank. So, sector as a whole? No, we wouldn't own it. Is there a name that if you have to own it that we'd focus on? It would be Key."

Gilbert's Susquehanna colleague Jack Micenko has a buy rating on KeyCorp and a price target of $25, implying 33 percent upside from current levels. The stock is down 7 percent this year.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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