When you think of small-cap growth stocks, you usually picture exciting companies with new products that capture the imagination. Maybe a biotech firm with breakthrough drug discoveries, or cutting-edge consumer tech companies. But sometimes growth shows up in unexpected places. And right now, one of the hottest sectors in the small-cap growth arena is small banks. Fundamental conditions are improving rapidly for the little banks, and the stocks are on fire.
Many of these banks were plagued by credit problems during the recent economic and real estate corrections. They had to set aside large amounts of money in reserve for potential losses. Now that the credit problems are mostly in the rearview mirror as real estate markets improve, these banks no longer have to take such large charges against earnings. In some cases conditions have improved to the point that they no longer need to hold as much in reserve and are able to add these dollars back into earnings — and growth is exploding.
Although the financial media has been largely mum on the improvement in small banks, Portfolio Grader is on the job and has spotted the rapid improvement. My weekly reports are full of small banks that boast the superior fundamentals and earnings growth that are the hallmark of the very best stocks.
Take a look at a bank like Farmers Capital Bancorp (FFKT). The Frankfort, Ky.-based bank has just 36 branches — a classic community bank. Conditions are improving much faster than analysts expected, and Farmers has blown away Wall Street’s expectations four quarters in a row. In the most recent quarter, earnings per share leaped ahead by more than 50% compared to the previous quarter. Wall Street may not have noticed, but Portfolio Grader sure did — the stock rating tool upgraded this stock last July to “A.” The fundamentals just keep getting better and the stock is still a “strong buy.”
Far away from Wall Street, Waterstone Financial (WSBF) has eight community bank branches in the state of Wisconsin. The bank has been organized as a mutual holding company but recently announced plans to sell stock to the public and become a fully converted state-chartered bank. These second-step conversions usually increase the value of the bank and give the banks additional cash to expand. The bank has been doing pretty well even before the offering. Earnings have been exploding; the bank increased earnings by more than 100% in the latest quarter. This stock was also upgraded almost a year ago to an “A” ranking and Portfolio Grader still has the stock rated as a “strong buy.”
You might not think of banks as growth stocks, but when little banks are in the early stages of a recovery, earnings grow by leaps and bounds and fundamentals improve quarter over quarter. Fortunately for us, these improvements tend to continue for several years, driving the stock price substantially higher over that time.
Louis Navellier is the editor of Blue Chip Growth.