Regional Bank Stocks Return to Life

by Anthony Mirhaydari | April 7, 2011 4:25 am

After months in the doldrums, the financials are catching a tailwind again. In fact, the Financial Select SPDR (NYSE: XLF[1]) has just crossed over its 50-day moving average for the first time since December 1 and has been a leading sector group for the broad market over the past week. This ends more than three months of relative underperformance.

To be sure, investors in the sector have had a lot to worry about lately — from regulatory “stress tests” to limited shareholder capital returns and new capital reserve requirements. Now these factors seem to have been adequately discounted and buying interest is beginning to return.

In particular, regional banks are perking up. Many of these — including my top 2011 pick Zions Bancorp (NASDAQ: ZION[2]) — aren’t encumbered by the kind of political pressure and legacy assets that weigh down the likes of Citigroup (NYSE: C[3]). You can see this in the way the Regional Banking SPDR (NYSE: KRE[4]) is perking up and moving out of its five-month consolidation range. Foreign banks are also on the move.

Here’s a look at my two favorite stocks in the group — stocks that I believe hold the most promise in the days and weeks to come.

First Midwest Bancorp (NASDAQ: FMBI[5]) is a community bank based in Illinois that specializes in commercial lending in the Chicago area — an area of economic strength thanks to the rising price of agricultural commodities and a rebound in manufacturing activity in the region. Shares are moving up and out of a long four-month consolidation range and look ready to enjoy its first sizable uptrend since late 2009.

Washington Federal (NASDAQ: WFSL[6]) is a $14 billion thrift bank headquartered in Seattle which serves six western states. The bank has made impressive progress on boosting earnings as foreclosure-related losses on its mortgage portfolio fall. Obviously, management is feeling confidence because not only was the dividend recently raised but the bank’s latent stock repurchase program was restarted.

Disclosure: Anthony has recommended KRE and FMBI to his newsletter subscribers.

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