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10 Financial Stocks Selling at Deep Discounts

If a second round of asset purchases by the Fed — known as quantitative easing — comes to pass, U.S. stocks may ignite. Financials, the leaders in the rally from the March 2009 low, have fallen out of favor in 2010. But there are cheap stocks in the sector. Here are the 10 cheapest financial stocks based on forward earnings multiples.

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10. Ashford Hospitality Trust is a real estate investment trust that owns hotels and resorts. Ashford swung to a second-quarter profit of $6.8 million, or 22 cents a share, from a year-earlier loss of $161 million, or $2.20. Revenue grew 3.6% to $240 million. The operating margin climbed from negatives to 11%.

Ashford's stock trades at a forward earnings multiple of 8.3, a book value multiple of 0.6, a sales multiple of 0.6 and a cash flow multiple of 7.3 — 92%, 74%, 91% and 60% discounts to peer averages. One analyst rates it "buy" and six rate it "hold."

Bullish Scenario: FBR Capital Markets offers a target of $11, implying 8% of upside.

9. National Financial Partners sells insurance and investment services to wealthy individuals and small companies. Second-quarter profit increased 20% to $12 million, or 27 cents a share, as revenue expanded 4.8% to $235 million. The operating margin contracted from 7% to 6.4%.

The company's stock sells for a forward earnings multiple of 6.3, a book value multiple of 1.5, a sales multiple of 0.6 and a cash flow multiple of 4.3 — 43%, 97%, 99% and 54% discounts to industry averages. One analyst rates it "buy" and six rate it "hold."

Bullish Scenario: Barclays predicts that the company's stock will advance 17% to $16.

8. Nelnet originates student loans. Its second-quarter profit sextupled to $50 million, or 99 cents a share, as revenue ascended 4.6%. The operating margin declined from 58% to 55%.

Nelnet's stock trades at a trailing earnings multiple of 5.6, a forward earnings multiple of 6, a book value multiple of 1.3, a sales multiple of 1.2 and a cash flow multiple of 5.1 — 60%, 53%, 39%, 16% and 5% discounts to consumer finance peer averages. Three researchers rate the stock "buy" and four rank it "hold."

Bullish Scenario: Northland Securities forecasts that Nelnet's stock will appreciate 29% to $30.

7. First Mercury sells specialty insurance products and services. Its second-quarter profit tumbled 64% to $4.2 million, or 23 cents a share, as revenue decreased 15% to $66 million. The operating margin narrowed from 24% to 12%.

First Mercury's stock sells for a trailing earnings multiple of 5.5, a forward earnings multiple of 6, a book value multiple of 0.6, a sales multiple of 0.6 and a cash flow multiple of 2.2 — 68%, 45%, 98%, 96% and 77% discounts to insurance industry averages. Of analysts covering the stock, four rate it "buy" and one ranks it "hold."

Bullish Scenario: KBW offers a target of $16, suggesting a 12-month return of 54%.

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6. American Equity Investment Life sells annuities and life insurance. The company swung to second-quarter loss of $1.5 million, or 3 cents a share, from a year-earlier profit. Revenue tumbled 75%. The operating margin rose from 6.7% to 8.8%.

American Equity's stock trades at a forward earnings multiple of 5.7, a book value multiple of 0.7, a sales multiple of 0.5 and a cash flow multiple of 1.4, 48%, 94%, 98% and 85% discounts to insurance peer averages. Of researchers covering the stock, five advise purchasing and one says to sell.

Bullish Scenario: SunTrust expects American Equity's stock to climb 40% to $15.

5. Rodman & Renshaw is a boutique investment bank. The company swung to a second-quarter loss of $4.6 million, or 12 cents a share, from a profit of $16 million, or 42 cents, a year earlier. Revenue dropped 51% to $16 million. The operating margin turned negative.

Rodman & Renshaw's stock sells for a trailing earnings multiple of 4.5, a forward earnings multiple of 5.6, a sales multiple of 0.6 and a cash flow multiple of 12 — 70%, 67%, 75% and 25% discounts to capital markets industry averages. One analyst rates the stock "buy" and one rates it "hold."

Bullish Scenario: Sandler O'Neill forecasts that Rodman & Renshaw's stock will soar 148% to $6.

4. Advance America provides cash-advance services and loans in the U.S., U.K. and Canada. Second-quarter profit decreased 23% to $5.1 million, or 8 cents a share, as revenue declined 5.8%. The operating margin climbed from 6.8% to 9.8%.

Advance America's stock trades at a trailing earnings multiple of 5.9, a forward earnings multiple of 5.5, a book value multiple of 1.4, a sales multiple of 0.5 and a cash flow multiple of 1.9 — 58%, 57%, 38%, 66% and 65% discounts to consumer finance peer averages. Two analysts rate it "buy" and two rank it "hold."

Bullish Scenario: Stephens values Advance America's stock at $8, implying 65% of upside.

3. Chimera Investment is a REIT that invests in residential mortgage-backed securities. Its second-quarter net income more than doubled to $125 million, but earnings per share rose 60% to 16 cents. Revenue nearly tripled. The operating margin rose from 88% to 94%.

Chimera's stock sells for a trailing earnings multiple of 5.6, a forward earnings multiple of 5.3, a book value multiple of 1.2 and a cash flow multiple of 11 — 92%, 95%, 49% and 39% discounts to REIT peer averages. It offers a yield of 18%. Seven analysts rate it "buy." Three rank it "hold."

Bullish Scenario: Sterne, Agee & Leach predicts that Chimera will advance 29% to $5.25.

2. KKR Financial is a specialty finance company investing in residential and commercial real estate securities and equities.

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It is taxed as a REIT. Second-quarter profit nearly tripled to $81 million, or 51 cents a share, as revenue stretched 59%. The operating margin widened from 68% to 88%.

KKR Financial's stock trades at a trailing earnings multiple of 5.1 and a forward earnings multiple of 5.3 — 72% and 58% discounts to financial peer averages. It's expensive based on book value. All four analysts covering KKR's stock rate it "buy."

Bullish Scenario: FBR Capital Markets offers a target of $12, suggesting a return of 34%.

1. Newcastle Investment is a REIT that invests in credit-sensitive real estate securities. Newcastle swung to a second-quarter profit of $119 million, or $1.90 a share, from a loss of $44 million, or 90 cents, a year earlier. Revenue dropped 30% to $81 million.

Newcastle's stock sells for a trailing earnings multiple of 0.6, a forward earnings multiple of 2.4, a sales multiple of 0.8 and a cash flow multiple of 3.6 — 99%, 98%, 88% and 80% discounts to REIT peer averages. Of researchers following Newcastle, one rates its stock "buy" and two rank it "hold."

Bullish Scenario: Macquarie forecasts that Newcastle's stock will gain 85% to $7.50.

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TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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