I’ll put it bluntly:
Wall Street hates falling stocks.
“Don’t try catching a falling knife…”
“You’ll never go broke by taking profits…”
“Sell in May and go away…”
And bank stocks are an exaggerated form of this. Declining share prices signal capital concerns, creating a feedback loop of more selling. You rarely want to buy a bank stock that’s fallen 50% or more.
The $26 Million Investment
At the same time, these risks make insider trading (the legal type) particularly notable. Bank balance sheets are notoriously opaque, so insider purchases are an unusually powerful signal about an institution’s underlying health.
Nowhere is this clearer than at JP Morgan (NYSE:JPM), a bank with a long history of insider ownership. As recently as 2016, CEO Jamie Dimon purchased $26 million of his bank’s shares after JPM stock fell 20%. He earned a 100% return within two years as fears over bank profits eased.
Today, a new crop of bankers is using the SVB Financial (NASDAQ:SIVB) banking crisis to scoop up shares in their corporate stock. These purchases are risky at best. But as my Insider Track Strategy outlines, following these insiders is also a proven way to beat the markets.
5 Bank Stocks With Massive Insider Buying: PacWest Bancorp (PACW)
PacWest Bancorp (NASDAQ:PACW) is a particularly notable case of cluster buying, a case where multiple insiders all buy at once.
- Directors. 7 Directors bought for a total of $909,000, including a $293,000 purchase by executive chairman Matthew Wagner
- CEO. Paul Taylor bought 22,800 shares worth $506,300
- COO. Mark Yung bought 3,148 shares worth $48,000
- EVP. Christopher Blake and William Black bought 19,660 shares worth $372,200
These purchases are especially notable because most of PacWest’s directors have never bought company shares on the open market. And it goes a long way in reducing fears about the company’s exposure to venture deposits, which make up a third of all deposits.
PacWest has also long worried investors with its thin capital cushions. Tier 1 capital stands at 8.7% — barely above the 6% figure required by Basel III rules. And Prior to the SIVB collapse, shares traded at only 0.84x book value.
The bank’s sudden 55% plunge changes all that. Suddenly, shares are trading at 0.3x book value, suggesting a 100%-plus upside if PacWest managers can prevent a run on assets. It’s a bet that insiders have made in the $20-$25 range, and one that investors will likely want to follow.
2. SoFi (SOFI)
On March 10, CEO Anthony Noto bought almost $1 million of SoFi Technologies (NASDAQ:SOFI) stock after shares declined 15%.
It’s a well-timed purchase. As I outlined earlier this week, SOFI stock probably has a fair value between $10 and $15, thanks to its relatively low exposure to rising interest rates and rapid organic growth. Most of the company’s assets are locked up in personal loans that mature in 1-5 years, making it less prone to write-downs from interest rate changes.
The company’s unusual business model also helps reduce the risks of an old-fashioned bank run (although it does raise other risks). SoFi focuses on acquiring retail deposits, which have higher acquisition costs, but are far more sticky than business accounts over the long run.
There are, however, some risks to buying SOFI stock. The company continues to operate at a loss because of the high marketing costs of acquiring retail deposits, and its rapid asset growth should make any experienced bank investor nervous. Fast-growing financial institutions often have trouble maintaining underwriting standards.
Still, a bank run is the least of SoFi’s concerns. Its day of reckoning (if one ever happens), will come much later.
3. CVB Financial Corp (CVBF)
Citizens Business Bank parent CVB Financial (NASDAQ:CVBF) was an obvious candidate for a selloff. The California-based bank was trading at a price-to-book premium, and fellow Golden State institution Silicon Valley Bank would have sent shockwaves through the state’s business banking system.
Yet, insiders seem to believe the worst is over.
- CEO. David Brager bought 1,000 shares worth $21,200
- COO. David Harvey bought 1,000 shares worth $21,600
- CFO. Allen Nicholson bough 1,000 shares worth $21,500
- EVP. General Counsel Richard Wohl bought 1,000 shares worth $21,000
The cluster buying is a bullish sign for the relatively opaque bank. The company doesn’t specify how its $14 billion in deposits are spread between retail and commercial banking, so the large number of insider purchases helps reduce fears of an outright bank run.
The company’s focus on Southern California real estate also puts it in a different league than SIVB. Around 76% of CVB Financial’s liabilities are in commercial real estate, so a 2% increase in interest rates should only change net income by 5% over 24 months.
It’s still a risky bet, but according to my estimates, CVBF stock likely has a 20% upside from current levels.
4. Equity Bancshares (EQBK)
Investors in Equity Bancshares (NASDAQ:EQBK) aren’t used to volatility. Wichita-based Equity Bank parent shares have traded in a narrow $29-to-$34 range since 2021.
Imagine their surprise when EQBK shares plummeted to $25 this week on fears of banking contagion. That would have priced shares at near-book value, a figure not seen since early 2021.
Insiders, however, have been using the opportunity to buy stock in the $27 to $28 range.
- Director. Gregory Gaeddert bought 2,500 shares worth $70,000
- CFO. Eric Newell bought 2,000 shares worth $55,400
Much like SoFi, Equity Bancshares have a completely different risk profile from Silicon Valley Bank. Most of Equity Bank’s deposits are from community markets, reducing the risk of sudden withdrawals. And its commercial loan book is far less exposed to rising interest rates than the mortgage-backed securities that SIVB held.
That makes EQBK’s potential 20% return worthwhile for investors already seeking safer bank stocks. It won’t be a 2x-3x winner like SoFi. But to many risk-averse investors, it’s a tradeoff that’s well worth it.
5. Charles Schwab (SCHW)
Rounding out the list is Charles Schwab (NYSE:SCHW), a stock that has fallen around 30% so far this year.
The financial institution has considerable exposure to mortgage-backed securities, making rate hikes especially painful. The firm already booked a $15.8 billion loss on $79.8 billion of its investment securities in November 2022 after accounting rules forced it to recognize unrealized losses. The 20% writedown has sparked fears that the rest of Schwab’s assets are worth far less than stated.
On March 14, corporate insiders sought to assure investors by buying significant stakes.
- Directors. 3 Directors bought 21,757 shares worth $1.243 million
- CEO. Walt Bettinger bought 50,000 shares worth $2.965 million
- President. Richard Wurster bought 5,000 shares worth $286,400
These purchases are somewhat unusual because of their enormous publicity. On Tuesday, CEO Walt Bettinger took to CNBC to announce his transactions. He would also use the opportunity to say his firm saw significant inflows after the SVB crisis.
But risk-seeking investors will take this as a positive sign anyway. Even with hindered growth prospects, Schwab is likely worth around $73, a 28% upside. And with insiders willing to spend their personal fortunes to shore up confidence, investors making the same bet will more than likely come out ahead.
The Risks With Bank Stocks
My quantitative Profit & Protection system runs financial stocks on a separate system. The fastest-growing banks and insurance firms tend to underperform, so my system favors those with mid- to lower-tier growth. The system would have avoided hypergrowth companies like Robinhood (NASDAQ:HOOD) and Coinbase (NASDAQ:COIN) in their hey-days.
Financial stocks are also a minefield of risk. Their stocks go up slowly, but then drop to zero all at once. It’s why most banking stocks trade in the 10x-15x P/E range, around half of the other S&P 500 companies.
Still, bank runs provide value-seeking investors with plenty of opportunities to profit. Investors who bought Western Alliance (NYSE:WAL) at $10 this week would already be sitting on 300% gains! And with bank balance sheets as opaque as ever, investors will find themselves better off following the Insider Track strategy than speculating which bank balance sheet will survive this crisis.
On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.