As we move into the fourth quarter today, the market faces some serious political challenges. Oddly enough, the best place to hide out might be in bank stocks.
We have a mixed bag of economic indicators, but on balance they show an economy that is recovering slowly but steadily. Consumer spending was up a little bit and the jobs outlook has steadied to some degree.
In a normal world, the stock market would be reflecting favorably on the economic outlook and continued low interest rates. Of course, with a government shutdown now in force and concerns about eventual tapering still hovering over our heads, we are not living in normal times.
I have talked several times about the fact that the rally would thin out and begin to favor stocks with the very best fundamentals. Well, one sector of the market — bank stocks — is seeing dramatic fundamental improvement, and could provide a little shelter from the storm.
The smaller regional and community bank stocks tend to move a little out of step with the market anyway, and unless the government shutdown lingers far longer than anyone participates, they should not feel much effect from the process. Small business still will function and make deposits, meet patrols and apply for loans regardless of what goes on in Washington. Meanwhile, people still will write checks, use the ATM and conduct their normal banking operations.
In addition, the real story in bank stocks is one of credit sand collateral improvement, not earnings growth, and that is not going to change anytime soon.
Many of these smaller bank stocks have received the highest grade of “A” from Portfolio Grader, and are well-positioned for profits in the final quarter of the year.
A great example of these small banks with big potential is Firstbank Corp. (FBMI), a $155 million market-cap stock that operates 53 branch offices in central Michigan. Firstbank provides commercial banking products and services, including traditional deposit accounts and loans tailored to meet the needs of its business customers. FBMI also offers trust, security brokerage and title insurance services, and even armored car services. This bank stock has been rated an “A” all year, and the fundamentals just keep getting better. FBMI shares remain a “strong buy” at current prices.
HopFed Bancorp (HFBC), at $85 million in market cap, operates 18 branches in middle Tennessee and Western Kentucky and can be thought of as poster child for what is going on in the small banking sector. An activist investor took a stake in the bank and opposed an ill-advised acquisition. Instead, he suggested HopFed management get its own house in order. Management went along and canceled the deal, instituted a stock buyback plan and doubled the dividend. HFBC was upgraded to an “A” back in May and still is a “strong buy” right now.
Investors should note that both stocks are very thinly traded, at less than 20,000 shares daily apiece, so limit orders and stop-losses are advised.
Nonetheless, small bank stocks can give you a place to hide from the market noise and turmoil without sacrificing the return potential that comes from owning the very best stocks.
Louis Navellier is the editor of Blue Chip Growth.