Earlier this week, I offered up three reasons that make Southeastern-focused regional bank Regions Financial (NYSE: RF ) a compelling buy. Now, I'm going to do a full 180 and explain why investors may want to consider selling Regions' stock.
Let's get right to it.
1. Based in the U.S. Southeast
The Birmingham, Alabama-based bank noted in a recent presentation that it has significant market share in fast-growing markets, specifically Nashville, TN, Atlanta, GA, and New Orleans, LA, where population growth in the coming years is expected to be well above the national average.
While that may be true, it also has a significant presence in Florida and Mississippi, where unemployment is well above the national average. In fact, according to the U.S. Bureau of Economic Analysis, the Southeast was tied for the slowest growth region in 2011. It was the third slowest (of nine) in 2010. In particular, major markets for Regions, including Alabama and Mississippi, were among the most troubled economies in 2011. Florida, Louisiana, and Arkansas were better, but still grew well below the national average.
While Regions may be cleaning up its balance sheet, its geographic focus may provide a considerable headwind.
2. Rising stock price
For existing shareholders, a rising stock price is a thing to celebrate -- particularly for those who view it as the stock moving from underpriced to closer to fairly priced. However, for investors on the sidelines, or those who are considering buying more shares, a higher stock price makes the shares less attractive.
Year to date, Regions' stock is up just about 50%, as compared to just 4% for the PowerShares KBW Regional Banking ETF, 18% for BB&T (NYSE: BBT ) , and a 3% loss for KeyCorp (NYSE: KEY ) . The run has a lot to do with the positive corporate developments for Regions -- like the sale of Morgan Keegan and the payback of TARP borrowings -- as well as the valuation gap between its stock and other, more highly-valued regionals, like BB&T.
But in the wake of that big run-up -- on the basis of its tangible book-value multiple at least -- Regions is now valued in the middle of the pack, rather than at the cheap end. For investors looking for the cheapest banks, there may be a case for trading out Regions for another bank that hasn't recovered as much, such as KeyCorp or SunTrust among the regionals, or Bank of America (NYSE: BAC ) and Citigroup (NYSE: C ) in the mega-bank category.
3. The economy
The economic conditions in the focus area of Regions may not be the best in the country but, when we step back to look at the bigger picture, there's further reason for concern. I skew optimistic in my assessment of what the future holds -- especially when thinking about longer time periods -- but it'd be a mistake to simply ignore stubborn national unemployment and slowing GDP growth. And while the U.S. may have enough challenges on its own, fallout from the ongoing showdown in Europe could provide additional drag on the U.S. economy.
You make the call
I've rated Regions Financial an outperformer in my Motley Fool CAPS portfolio. With ammo like the points above, you may not feel the same way. Whatever your position, make sure to share your rating and two cents on CAPS.
Even though the banking picture may not be perfect, it's been compelling enough to attract some of the smartest investors out there. To see what I mean, check out the Motley Fool's free special report, "The Stocks Only the Smartest Investors Are Buying."