Whenever the conversation turns to stock sooner or later I am going to talk about community bank stocks. There are other small pockets of opportunity in the stock market like small REITs, some oil stocks and special situations but the most compelling opportunity in the market is the community bank stocks. The bigger ones need to buy to grow assets and earnings. The smaller ones cannot survive independently because of regulatory and technology costs. We all know it is going to happen over the next few years so now we are just haggling about price. In the meantime book values are growing by round 6-7% as credit conditions improve and banks can use excess capital to buyback stock at the current low levels. Deal multiples are creeping higher and are currently running right around 135% of tangible book value. Since we can buy a decent portfolio of small banks with sound loan portfolios, plenty of capital and at least one activist investor involved at 90% of book or less I question why more people aren’t doing this?
I am usually shouted down by the chart guys, the tech fans, the biotech buyers and the unknowing financial suicides known as retail options traders. The more I talk about the little banks the more I feel like John Adams in the musical 1776 with the crowd shouting for him to sit down as he argues the same point over and over. Of course John Adams was eventually proven right and so far so have I. I expect that to continue.
When not crusading for the small ban I spend a lot of time looking for bargain issues in the broader market. We are not finding many but I run a lot screens getting ready for the next inventory creation event. I try ...
