Buy Financial Stocks? Do You Think I'm Crazy?

Many a wise investor has warned: "Only invest in companies that you completely understand."

Because of that, I normally won't touch financial companies with a 10-foot pole. Having watched one of our country's biggest banks -- Bank of America (NYS: BAC) -- halve its value in 2011, and seeing an unintuitive reversal of debts and assets on banks' balance sheets, I just can't find much reason to invest here.

But our Rising Stars contend that I'd be missing some great opportunities for growth by ignoring the sector. We created the Rising Stars program to offer expert ideas to the everyday investor, and nowhere is this more helpful for me than in looking for stocks in the financial services field.

Below are five companies our analysts love; add these companies to your watchlist, and you'll stay up to date on all of their latest news. Read to the end, and I'll offer you access to a report that details five stocks The Motley Fool has put its own money behind.

Without further ado, our analysts' five picks...

Chimera Investment (NYS: CIM)
Fool analysts Ilan Moscovitz and Sean Sun picked Chimera for their shared portfolio back in May.

Chimera, backed by parent company Annaly Capital (NYS: NLY) , has a somewhat more complex strategy for profits than your run-of-the-mill mortgage real estate investment trust: "It buys primarily riskier mortgages, which generates a higher spread but forces management to be more conservative with leverage," Ilan explains.

Ilan points out that this could be an excellent short- to medium-term hedge against a slow economy. That's because Chimera profits from the spread between its borrowing costs and the long-term rates it charges customers. With the Federal Reserve holding interest rates around 0% to combat high unemployment and low inflation, that spread looks to remain intact for a while. It also helps explain why Chimera is able to offer an eye-popping 18.8% dividend yield.

Berkshire Hathaway (NYS: BRK.B)
Berkshire Hathaway is more than just a financial services company. It owns furniture stores, candy retailers, and jewelers. But at the core of this company, you'll find a vast array of insurance companies.

Alex Pape tapped the company for his portfolio back in January, and Jason Moser followed suit in June. The reason for their decision is pretty clear: "Perhaps the greatest argument for an investment in Berkshire is the opportunity to ride the coattails of a legend. Since 1965, [Warren] Buffett has grown Berkshire's book value at a compound annual rate of 20.2%," Jason said.

Both were likely ecstatic to hear of Berkshire's first-ever buyback announcement this past month as well. Apparently, Buffett agrees with Jason and Alex that, at this price, the company is a steal.

Aflac (NYS: AFL)
Everyone's favorite duck has fallen on hard times lately, as its exposure to Europe drags on its stock price. That hasn't stopped Bryan Hinmon from buying and holding shares in the company.

Bryan had three simple reasons for buying Aflac. For one, it has innovative products (the company was the first to introduce a cancer-expense policy) and a solid distribution network. Aflac also has an appealing price and quality earnings. Finally, the founding-family-led business is in the hands of excellent stewards.

Shares are 20% cheaper today than they were when Bryan bought the stock.

  • Add Aflac to My Watchlist.

Aon (NYS: AON)
This insurance and HR specialist has been pegged not once, but twice by Michael Olsen for his portfolio.

At first, Michael believed in three large catalysts for the company:

  1. A move by traditional insurers to buy reinsurance, which Aon offers, in the wake of catastrophes in Japan in Australia.

  2. An undeniable need for underwriting rates to go up ... to Aon's benefit.

  3. The acquisition of HR specialist Hewitt.

After waiting five months and seeing no change in the thesis, or realization by the market of this opportunity, Michael went in for a second helping.

  • Add Aon to My Watchlist.

Bank of Hawaii (NYS: BOH)
We end our foray into the financial services field by looking at a small regional bank that caught Anand Chokkavelu's eye: Bank of Hawaii.

Anand loves the returns on equity that the bank brings. But what really gets him going is the kind of moat the company enjoys: "Bank of Hawaii's moat is kind of literal inasmuch as the Pacific Ocean protects it from expanding foes."

If a well-run, well-protected regional bank sounds intriguing to you, add this company to your watchlist today.

Five more companies the Fool believes in
If you'd like five more ideas, I suggest you check out our special free report: "5 Stocks The Motley Fool Owns -- And You Should Too."

A group of our top analysts hand-picked these stocks. You can get the report today, absolutely free!

At the time thisarticle was published Fool contributorBrian Stoffelowns shares of Berkshire Hathaway and Aflac. You can follow him on Twitter at@TMFStoffel. The Motley Fool owns shares of Chimera Investment, Aon, Aflac, Bank of Hawaii, Berkshire Hathaway, and Annaly Capital Management.Motley Fool newsletter serviceshave recommended buying shares of Aflac, Berkshire Hathaway, and Aon. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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