Regional Bank Stocks: Next Leg Up for Retirement Investors?

by: Aaron Katsman

I was recently speaking with a client and he asked me what’s interesting to invest in these days. He said he wanted some stocks to hold for the next 5-10 years in order to get his retirement savings much higher. (This was not money that he said he needed in the near future). He was expecting me to say technology, commodities or Brazil. When I answered that I thought that regional banks in the U.S. are pretty interesting, he made a face at me and said, “Are you joking? The economy stinks, banks are going bankrupt and it’s their fault we had the financial crisis to begin with. Why on earth would you want to invest in them?”

There is no question that this would be classified as a ‘contrarian’ investment. Investors who go against the general market trend are called “contrarians.” A contrarian is also defined as an individual who believes that certain crowd behavior among investors can lead to exploitable mispricings in the securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company’s risks and understates its prospects for returning to profitability. Go back to last summer and the horrific BP oil spill. Every newscast was reporting about the total environmental devastation and that BP wouldn’t be able to survive. The stock lost more than half of its value in a short time.

During that crisis, I wrote in this column:

a contrarian investor would make the case that the company is the 4th most profitable company in the world, and it’s already lost more than half of its value. In addition, a contrarian would assess that even the worst case scenario would mean that the company’s litigation exposure and clean up costs would come to maybe 2-3 years of its operating income. And no one expects the company to pay up immediately; rather, much of the litigation exposure will get tied up in the courts for years. It was 19 years after the Exxon Valdez oil spill until the Supreme Court made a final ruling as to Exxon’s legal liabilities. I want to emphasize that this is by no means a recommendation to buy the stock — it’s just a good example to explain the concept.

Since this point a year ago, the stock has moved up over 50% from its low. This isn’t about saying, “I told you so,” rather about investors looking at things rationally and then making informed decisions; not investing emotionally because of what the headlines say.

The Case

I am not recommending that you run out and buy regional bank stocks. This is what I would call ‘idea generation’ and you should research these stocks carefully and consider whether such an investment is appropriate for you before investing.

We are always taught to learn from history. If we look back 20 years we will find an interesting parallel to today vis-à-vis the state of the banks. The late 80’s and early 90’s brought a banking scandal (funny how they seem to happen every 10 years or so!), the saving and loan crisis. Many banks went under (over 1,000), there was a government bailout and there was tremendous pessimism in the sector (sound familiar?).

After all the carnage, the banks that actually survived emerged from the crisis in good financial shape. We then saw insiders (CEOs and CFOs) start buying shares of their own stock, improved earnings growth and a wave of consolidation that lasted for the better part of a decade( think about how your local bank was bought and then that bank was bought and that one.. etc.).

Fast forward to 2011 and things seem similar. While hundreds of banks closed, many of the survivors are actually in very good financial shape. Whether or not the bailout was a good idea is irrelevant. What is relevant is that many banks have clean balance sheets, have repaid their government loans, and have reinstituted or increased their dividends. The Bank of Hawaii (NYSE:BOH), Keycorp (NYSE:KEY) and Peoples United Financial (NASDAQ:PBCT)--which just raised their dividend for the 14th straight year and now yields 4.6%--are among many examples of this.

According to recent regulatory filings, banks like Huntington Bancshares (NASDAQ:HBAN) and Regions Financial (NYSE:RF) have seen recent buying by both insiders and hedge funds.

While buying and selling constantly and trying to time the market are not always advisable, it is worthwhile remembering that there are always opportunities in the market, especially after it has dropped. Analyze investments objectively without getting caught up in the hysteria or fear. Low prices created by panicked investors could potentially create profits for others when both common sense and fundamentals return.

Disclosure: Portfolio Resources does not make a market in, nor does it have an opinion on any of the securities mentioned in this article.

Disclaimer: I want to reiterate that this is not a recommendation to buy any of these stocks mentioned above, they are just examples of what is starting to happen in the sector.

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