Investors are learning that when it comes to big banks, size doesn't necessarily matter.
The household name banks neither evoke confidence nor trust in the majority of Americans. This is evidenced by the movement toward regional banks and credit unions, which has been growing stronger every year and steadily taking business away from their larger peers.
Besides not facing many of the legal and governmental issues known to big banks, regional firms are largely non-targets of negative headlines. More importantly, their fiscal and moral compass seems better aligned than that of their king-sized peers.
CNNMoney recently reported: "Regional banks that didn't take Troubled Asset Relief Program (TARP) funds are a good place to start. Several midsize lenders turned down the government's bailout because they didn't need the funds. They may not be household names, but many offer higher-quality loan portfolios and bigger yields than the big banks."
Search for undervalued names
Interested in regional bank stocks? Because of the risk that the banks are exposed to, traders often want a little more reassurance before they buy to avoid getting stuck in a value trap.
Investors have many ways to value a stock, but one of the more strict methods is the Graham method. Benjamin Graham is considered the "Godfather" of value investing and was a former mentor of Warren Buffett. He developed his method from earnings per share (EPS) and book value per share, and it is his calculation for the maximum fair-value price of a stock. Stocks trading significantly below their Graham Number are considered to be potentially undervalued.
The Graham Number = Square Root of (22.5) x (TTM EPS) x (MRQ Book Value per Share).
What's more, investors like to know what the big institutional buyers on Wall Street are up to. It's often thought that the more intelligent traders ("smart money") are the ones calling the shots in these big hedge funds, so when there is net buying of shares by these institutions, main street investors can consider their purchases a strong vote of confidence on the stock's future.
Since they manage large pools of money such as mutual funds and hedge funds, when they invest in stocks, they can invest hundreds of thousands of dollars or more at one time. These transactions, called "block trades," can have a significant effect on share prices.
Business section: Investing ideas
To make the list below, we started with regional bank stocks with market caps over $300 million. We compared their current prices to their Graham Numbers -- searching for names with significant upside to "fair value," and then checked for net institutional purchases over the current quarter.
Do these names seem undervalued to you? Do you agree with the smart money?
List sorted by market cap. Use Kapitall's tools to conduct a more in-depth analysis on the names below. (Click here to access free, interactive tools to analyze these ideas.)
1. Zions Bancorp.
2. Community Bank System
3. Pinnacle Financial Partners
4. Central Pacific Financial
5. Tompkins Financial
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Danny Guttridge does not own any of the shares mentioned above. Institutional data sourced from Fidelity. EPS and BVPS data sourced from Yahoo! Finance, all other data sourced from Finviz.
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