3 Top Small-Cap Financial Stocks

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Small-cap companies offer investors the chance at extremely strong returns, albeit with heightened risk levels. By identifying these companies early in their development, ground-floor investors can cash in with impressive profits over time as growth pushes them into the upper echelons of their respective industries. In particular, several small-cap stocks in the financial industry have done extremely well over the past year by identifying key niche areas on which to focus their efforts. To shed some light on them, let's look more closely at three of the best stocks in the small-cap financial arena.

Insuring long-term successInsurance companies have had a great couple of years, as losses have generally been low, allowing them to keep more of their earned premiums as profit. Universal Insurance Holdings isn't a household name, but it has taken the opportunity to look beyond its traditional coverage area and has seen its stock more than double over the past year as a result.

Universal previously did most of its business in its home market of Florida. Yet recently, Universal has pressed outward to become more of a regional player in the industry, and in its second-quarter financial report, the insurance company reported record levels of net income. CEO Sean Downes pointed to the success of strategic changes to its 2015-2016 reinsurance program as driving the company's ability to boost its profits. That in turn should put Universal in an even better position to expand over time, and both through moving into new geographical markets and by boosting market share in the areas where it already does business.

Making money on mortgages The mortgage market has gone through huge disruptions over the past decade, with the financial crisis jeopardizing the entire real-estate-finance industry. Things have recovered substantially, though, and Walker & Dunlop has participated in the recovery by focusing on the commercial mortgage market. Over the past 12 months, Walker & Dunlop has seen its stock soar 95%.

Walker & Dunlop specializes in financing commercial real estate projects, offering bridge loans, construction loans, and more permanent solutions both through the established secondary market for commercial mortgages and by taking assets onto its own balance sheet. Sustained loan origination volumes have helped Walker & Dunlop grow its overall portfolio extensively, and with money coming in from servicing revenue as well as transaction-based income, the company is growing in all of its key divisions. Some fear the future for real estate in general, but Walker & Dunlop has been around long enough to have endured past down cycles and has demonstrated an awareness of conditions in the industry that should suffice to protect it from the worst of a rising-rate environment.

Making investors money, in two different ways Fund manager Diamond Hill Investment has put together a good track record for many of the investors who put money in its mutual funds. Yet the company has also done well by its own shareholders, producing a 50% gain over the past 12 months even as the financial markets have started to get choppy.

Diamond Hill has reported consistent growth in sales and earnings, and that has helped drive its stock price higher. In its most recent quarter, sales climbed 23%, with net income rising by nearly a third as the company continued to enjoy impressive gains in assets under management. One of the reasons it has been successful is that Diamond Hill's approach has resonated with investors, as it seeks to combine a value-oriented philosophy with a mix of active and index-based strategies to implement its core beliefs. As long as the markets cooperate, Diamond Hill is in a good position to take advantage of favorable conditions in its core industry.

Small-cap stocks seem risky to many, but the rewards they offer can make those risks worth taking. These three top performers among small-cap financial stocks show the benefit of identifying smart business opportunities and honing in on them to take full advantage for the benefit of shareholders.

The article 3 Top Small-Cap Financial Stocks originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Walker & Dunlop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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