In many ways, the cloud of worry surrounding financial companies at the onset of 2009 has cleared. Banks’ stocks finished 2010 on a roll—gaining almost 19% compared with the S&P 500’s nearly 13% rise over the same period. Money manager Raymond Stewart says the credit quality concerns and waves of loan defaults witnessed during the Great Recession began to subside four to six months ago. Rising interest rates, meanwhile, could actually help banks lift lending rates and fatten their bottom line. A recovery has helped the biggest in the bunch lift dividend payments to shareholders. And while higher oil prices could stamp out the economic rebound, Stewart says banks are less overextended and presently in a stronger position to fend off a downturn. He cautions, however, that after last year’s run, it’s probably time to be a bit pickier about the sector as a whole. “We’ve seen a bottoming of bank valuations, and last year’s interest in banks and financials has somewhat overplayed itself,” he says. “Savvy investors should look to buy into the group on pullbacks.”
Stewart, a longtime financial sector watcher, has a preference for smaller stocks in the group. The reason: He feels Wall Street and big institutional money managers devote the majority of their time and attention to the largest players. The smaller banks, for their part, are often more conservative, better-run, and undervalued so there’s an opportunity to unearth an underappreciated investment. It’s a tactic that he’s honed while heading RASARA Strategies Inc., his White Plains, New York, money management firm, since 1997. Before that he was a bank analyst for Salomon Brothers and a joint owner of the financial research firm WRM Equity Management Inc. black enterprise talked to Stewart about his top three choices among banking stocks.
New York Community Bancorp (NYB) is a bank holding company that operates more than 240 branches in New York, New Jersey, Ohio, Florida, and Arizona. It also holds a commercial bank that operates in the New York metropolitan area. The $7.5 billion market cap bank has run a solid ship during the financial crisis and after. Stewart notes that NYB managed to maintain its dividend throughout the entire crisis, when many banks were cutting theirs altogether. “They’re considered one of the darlings of income-based mutual funds because of their solid yield,” Stewart points out. He says NYB is compelling not only for a generous 6% yield, but also for the solid credit quality of its loan portfolio—factors he feels could push the stock to about $20 a share in the next 12 to 18 months.
U.S. Bancorp (USB) is a Minneapolis-based national financial institution that engages variously in credit card services, merchant and ATM processing, mortgage banking, insurance, brokerage, and leasing throughout the U.S. The company has a $50 billion market capitalization. Stewart likes the bank’s recent decision to pay a 50 cent per share dividend and its plans for a 50 million share buyback. These tailwinds could push a 15% appreciation in USB’s mid-$20s stock price over the next 12 to 18 months. He says USB may also be on the lookout for acquisitions in the near future; rumors have circulated that the bank might be eyeing Royal Bank of Canada’s operations in the Southeast, for example.
Intervest Bancshares (IBCA), the New York City-based commercial and consumer banking service corporation, is a somewhat more speculative play—but one with a large potential upside. The money manager says an $8.80 book value per share is a far cry from the bank’s stock price. That’s reason enough for a potential climb to $4 to $5 a share in the next 12 to 18 months. Intervest did take a hit in 2009, when the small firm with $2.4 billion in assets and a $52 million market cap saw loan problems slash away at its pre-crisis $26 book value. If IBCA makes it through the 2011 first quarter with no surprises from its real estate and consumer lending businesses, the stock should be on its way to $4 over the next 12 to 18 months.