Searching for promising equity plays in the U.S. market recently has been interesting, given recent speculation regarding central bank action and the volatility that has resulted. Still, for brave investors, there are some potential gains on the field.
Narrowing down the universe of equities to firms headquartered in the United States and trading on U.S. exchanges with prices less than tangible book value per share, we get just over 1,000 companies. Adding the additional criteria of these firms being among the top 20% with respect to most active management insiders buying shares of their own companies, we find eight gold nuggets in the financial sector. Here are four:
1) Emclaire Financial Corp (EMCF): This is the holding company for The Farmers National Bank of Emlenton. According to the description, the bank operates as a full service community bank. Price of equity shares of EMCF was $19.85 today, with tangible book value per share reported at $20.43. Daily volume for EMCF was relatively low, around 1000; P/E stands at 9.09, with market cap just near $36 million. Dramatically positive EPS results over the last years signal management aptitude; gross profit margin is over 79%. However, investors should be aware that net profit margin of 19% is below the industry average.
Peer firms include Colony Bankcorp Inc (CBAN), Southern Mich Bancorp (SOMC), Royal Bancshares (RBPAA), Rurban Financial Corp (RBNF), Mid Penn Bancorp (MPB), United Security Bancshares (UBFO), National Bancshares (NBOH), United Sec Bancshares (USBI), New Century Bancorp (NCBC), Cullman Bancorp Inc. (CULL), and others; investors who wish to conduct analysis of peer firms should look to these when considering various metrics.
Compared to the second quarter of fiscal year 2011, EMCF's gross profit margin for Q2 2012 increased. Moreover, the firm was able to grow sales and net income faster than industry peers. Additionally, shareholders' equity increased nearly 15% in this period of time. Thus, there exists many compelling arguments in favor of this stock going up over the next year or so. To me, the most compelling are the astonishing industry-outperforming growth and the tangible book value per share.
2) Jacksonville Bancorp Inc (JXSB) is the holding company for Jacksonville Savings Bank. According to the bank's description, its offices are located in Jacksonville, Morgan, Macoupin, and Montgomery counties in Illinois. Daily volume stands at 1,400 -- also relatively low; but shares of JXSB trade at $16.90, TBV's price/share stands at $20.39.
With similar P/E of 9.24 and market cap of $32.46 million to its peers' TBV, this also represents a potentially lucrative trading opportunity, given its insider buys of the last month. Strong performance over the last year has been coupled with only moderately good earnings results, making this investment a difficult one to predict into the future. However, return on equity has improved a bit from previous quarters, perhaps signaling the fairness of a bullish outlook.
Competitors here include First Savings Financial GP (FSFG) , FedFirst Financial Corp (FFCO), Wolverine Bancorp (WBKC), Eagle Bancorp Montana (EBMT), Timberland Bancorp (TSBK), Riverview Bancorp (RVSB), MSB Financial Corp (MSBF), Citizens Community Bancorp (CZWI), PSB Holdings (PSBH), LSB Financial Corp (LSBI), and more.
It may be worth noting that shareholders' equity on Jacksonville Bancorp's balance sheet increased nearly 12% from Q2 last year to Q2 this year. This, along with the tangible book value per share criterion, is a strong factor in favor of the bullish case.
3) Pacific Premier Bancorp Inc (PPBI) is the holding company for Pacific Premier Bank. The bank operates primarily in the areas of branch banking and income, property, and construction lending. Its locations are in Orange and San Bernardino counties, both located in Southern California. The bank has 148 employees.
Daily volume is a bit higher at 8,250 shares. Price of PPBI shares stands at $8.79, while TBV/share is at $9.03. P/E for this bank is lower at 8.73, and the bank's market capitalization is just over $91 million. Revenue growth stands at 31% -- this is a primary driver of EPS accretion. Moreover, strong earnings growth of 587.5% in the last year has driven this stock to surge in the last months. As such, there's good reason to believe this pattern will continue due to all of these factors.
Peer group banks include BCB Bancorp Inc (BCB), Citizens Holding Co (BCBP), Union Bankshares Inc (UNB), Norwood Financial (NWFL), North Valley Bancorp (NOVB), Macatawa Bank Corp (MCBC), LCNB Corp (LCNB), Chemung Financial Corp (CHMG), Farmers National Banc Corp (FMNB), Century Bancorp Inc (CNBKA), and others.
The fact that gross profit margin for Q2 2012 increased dramatically compared to Q2 2011, sales and net income growth was higher than industry competitors' parallel metrics in Q2 traditionally, and shareholders' equity increased by over 17% in this period, all point to future increases in share price, in my opinion.
4) First Community Corporation (FCCO) is the holding company for First Community Bank, N.A. Locations are in Columbia, South Carolina and the surrounding area, including Lexington and Richland counties. The bank has 157 employees, and its equity shares currently trade for $8.25 with TBV/share at $11.25 -- one of the larger divergences. Volume daily is ~10,460, with P/E of 7.92 and market capitalization of $39.82 million. Quarterly EPS has improved by 35.3% from the last year, net income growth in the quarter increased 27.8% from the same quarter last year, and the gross profit margin stands at a whopping 81%. The fundamentals of this company are strong, and there's good reason to believe the stock will continue to outperform.
Commercial bank peers here for possible due diligence analysis are Community Bk Shares Inc (CBIN), First South Bancorp Inc (FSBK), Xenith Bankshares Inc (XBKS), 1st Century Bancshares Inc (FCTY), Valley Financial Corp (VYFC), Salisbury Bancorp Inc (SAL), Western Liberty Bancorp (WLBC), Allegheny Valley Bancorp Inc (AVLY), Athens Bancshares Corp (AFCB), Savannah Bancorp Inc (SAVB), and others.
In addition to the powerful case made up by the TBV/share criteria, as above, I believe the bottom line increases on the financial statements point to equity share appreciation here and potential EPS accretion into future months. Though sales decreased from Q2 last year to Q2 this year, net income and gross profit margin increased.
Once again, a compelling argument in favor of the long thesis on all of these equities is the fact that they are currently trading below tangible book value per share. This is a powerful support for current trading levels, unless an investor has reason to believe that reported book value of tangible assets is, for some reason, inaccurate.
Moreover, the management buy criteria adds to the bullish case for each of these; with standings in the top 20% of the 1,080 U.S. equities trading below tangible book value per share today with respect to management insider buys, outside investors have good reason to be optimistic about the prospects of these securities.
Lately, many financial stocks have been trading below tangible book value per share and book value per share, perhaps as a result of uncertainty regarding increasing implementation of financial regulations following the 2008 financial crisis and/or whether the books of companies in the sector fully reflect reality.
Compared to major players with very high daily volumes, such as Bank of America (BAC), Citigroup (C), and the big investment banks such as JPMorgan (JPM), Credit Suisse, and Goldman Sachs (GS), these smaller regional banks' equity shares may offer more risk (they're most certainly not "too big to fail") but also more return potential. For speculative funds, though, these four equities may be worth the investment, especially given the reasons outlined above.