Richard Bernstein, the fund manager, author, and former Merrill Lynch strategist, was on CNBC Friday morning talking up small-cap US bank stocks as an investment idea nicely leveraged to the US recovery without the exposure to the overseas credit bubbles that haven’t popped yet.
I have great admiration for Bernstein, who called the dot-com bubble and the 2008 crash, and generally tends to keep his head when others have lost theirs.
Great, what a happy coincidence, I think. I was just going to write about a small-cap bank this morning. I covered Bernstein’s small-cap bullishness back in December, and with the Russell 2000 small-cap index up 12% year-to-date (vs. 8% for the S&P 500), that call looks terrific at this point.
So the smaller bank stocks I wrote about must be killing it, right? Well, Eagle Bancorp (EGBN) was up 8% since January 9, through Thursday. First Niagara Financial Group (FNFG), a midcap pick, was up 10% over the same span.
Eight percent in five weeks is better than a poke with a stick. But killing it? Hardly, Bank of America (BAC) was up 29% over the same span. Now that’s killing it.
Perhaps Bank of America’s book had been discounted too severely before the recent run. Because it clearly remains a worse bank than most of its smaller rivals. It’s an overstretched empire assembled by an empire-builder who hasn’t been in charge for years. It’s overseen these days by a seat-warmer who sees nothing wrong with multimillion-dollar golden parachutes for unwanted executives
The quickly reversed $5 monthly service charge for debit cards, instituted fleetingly at the height of the Occupy Wall Street protests, tells you everything you need to know about the bank’s skill at public relations and customer service.
For my money, a small-cap financial like Boston Private Financial Holdings (BPFH) is a much better bet. It’s a private banker, wealth manager, and investment advisor to affluent clients in the Boston area, with affiliates in San Francisco, Los Angeles, and Seattle.
Income from fees was up 12% last year, and amounted to 70% of the bank’s net interest income. The name came up in the course of reporting about my hometown bank, my source mentioning BPFH as a strong play on income from feesâ€"which are going to become increasingly important for banks as low interest rates pressure their interest margins.
More generally, Boston Private is positioned in the right geographic areas, and the right demographic, to cater to the winners of the information age. It has endured a painful restructuring, and is now aiming to grow.
As it happens, the stock has just broken out of a bullish formation according to chessNwine of iBankCoin, a technical analyst worth following.
So there are tactical as well as fundamental reasons to get long the stock. The next stage of the rally should be all about names like BPFH outperforming winning lottery tickets like BAC.