It is no secret that I like bank stocks a lot right now. The credit problems of the past few years have passed into the rear-view mirror, and we are seeing some slight improvement in the economy.
Most banks will be a beneficiary from higher interest rates, if and when that ever occurs. Valuations across most of the industry are quite reasonable right now, there are many banks trading at reasonable multiples of book value and earnings. Also, many smaller banks are trading below book value which represents and extraordinarily attractive entry point.
Over the years, I have found that one of the very best ways to uncover profitable bank stock opportunities is to steal ideas form those institutional investors who have racked up a strong track record buying financial institutions.
As 13F season has just closed now is on good time to put on our pirate hats and look among the bank stock specialists portfolios for ideas worthy of stealing for our own portfolios.
Jacobs Asset Management is one firm with a lot of potential winners to sift through. The firm was founded in 1995 by Sy Jacobs to invest in financial institutions. Prior to opening the funds Mr. Jacobs was an analyst covering financial and banks for Alex. Brown and Sons, Mabon Nugent, L.F. Rothschild and Co., and Salomon Brothers. He more than proved his market savvy when he sold his NYC townhouse in 2005 and rented because he felt the real estate markets were getting dangerously expensive. He is clearly a smart guy with a good nose for value.
His purchases in the second quarter of the year included Peoples Bancorp (PEBO), a 50-branch bank based in Marietta, Ohio. The bank is reasonably priced at just 95% of book value and 11 times earnings right now and would be a good fit for a long term financial services portfolio. The bank has been performing very well with earnings growth in excess of over 40% annually for the past five years and analysts expect an increase in profits of over 70% in the year ahead. Peoples recently closed on the acquisition of NB&T Bank and expects to renter the merger market next year as they look to continue to grow the bank.
Mr. Jacobs fund was also a buyer of United Financial Corporation (UBNK). The bank currently has 56 branches in Connecticut and Massachusetts with about $5.6 billion in assets. In the most recent quarter United Financial reported record earnings with profits of $.27 a share compared to a loss in the year ago period. The bank has made significant progress since closing the merger with Rockville Financial last year. Investors are still able to get the stock at a bargain price as the stock is trading at just 12 times analysts’ expectations for next year and 1.05 times book value. United Financial is also a decent yield stock selection with a current yield of 3.7%.
His funds also bought some more shares of MidSouth Bancorp (MSL) in Lafayette, Louisiana. MidSouth is another bank that is performing nicely and in the most recent quarter reported were $0.42 per common share, compared to $0.34 per common share reported for the second quarter of 2014 and $0.12 per common share reported for the first quarter of 2015. Over the past five years earning shave improved by about 25% annually for MidSouth. The bank is located in a region that has seen a lot of merger an acquisition activity with 58 locations in Louisiana and Texas. The shares currently trade at just 92% of book value and 11 times earnings so they are still at bargain levels. The dividend yield is 2.6% at the current price so it is a decent income selection in todays low yield world.
One of the best ways to find solid bank stock picks is to steal them from experienced successful bank stock investors and Sy Jacobs has proven himself to fit that definition.
