As the stock market powers its way to new highs this week, investors are becoming increasingly pickier about where they put their money. Companies with strong earnings growth are being rewarded generously and those that disappoint the big institutions and funds are being punished severely.
If you’re hoping to buy a story or sales pitch and watch the stock push higher regardless of the underlying fundamentals, you’re out of luck because those days are over. Investors will have to be more selective and concentrate on the sectors and stocks that have excellent fundamentals and are seeing strong buying pressure.
One such sector is the smaller regional and community banks. The fundamentals of the regional banking sector have improved dramatically over the past year as loan losses have slowed and real estate prices have rebounded somewhat. The slowly improving economy has also helped spur stronger loan demand and deposit growth for many of the smaller banks.
Going forward, the banking sector is one of the few that will benefit from higher interest rates. Even the problems facing the industry can be good news for investors as the rising cost of regulatory compliance is probably going to cause a mergers and acquisition wave in the smaller banks, and that can only be good news for investors holding the banks with the best fundamentals.
For help identifying those banks, we turn to Portfolio Grader.
1st Century Bank (FCTY) is a great example of a small bank with strong fundamentals. The bank has a branch in Los Angeles and has about $538 million in assets. The bank has seen steady credit improvement over the past few years with its total problem assets dropping from almost 3% of total bank assets in 2011 to just 0.15% today.
This type of improvement has helped drive earnings growth for FCTY stock, and the banks’ profits are up more than 200% in the last year. In its latest earnings report, the banks saw loan growth increase by 34%, while non-interest bearing deposits grew by 15%. Portfolio Grader saw the improvements in the stock and upgraded the stock to an “A” back in May. FCTY stock remains a “strong buy” at the current price.
BSB Bancorp (BLMT) has four branches in Middlesex County, Mass. with about $1 billion in assets. The bank has seen steady credit improvement, and earnings for the full year were up about 37% year-over-year. Net loan growth was up 28.2% year over year while deposits grew by more than 25%. Management has been buying shares and in 2013 repurchased 476,622 shares of its common stock. The steady improvement has been noticed by Portfolio Grader and the stock was upgraded to a “buy” this week.
Note: Both of these stocks are very thinly traded at just a few thousand shares changing hands every day. Thus, if you do plan to make any trades involving these stocks, you should use limit orders and stop-losses.
When most investors think of banks they tend to thing of the larger banks like Citigroup (C), Bank of America (BAC) or JPMorgan (JPM). However, the best fundamentals and strongest buying pressure have been in the smaller regional and community banks. As the stock market becomes more selective, investors should focus on these banks to take advantage of the continued improvements in the sector.
Louis Navellier is the editor of Blue Chip Growth.