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 in the field.
In the first piece of this series, I narrowed down the universe of equities to companies headquartered in the United States and trading on U.S. exchanges with price less than tangible book value per share and got just over 1,000 companies. Adding the additional criterion of these companies being among the top 20% with respect to most active management insiders buying shares of their own companies, we found eight gold nuggets. Here are the other two financial sector equities from this screen's results:
1) North State Bancorp (OTCBB:NSBC) is the holding company for North State Bank, Inc. located in Raleigh and Garner, North Carolina. With 122 employees as of the end of June 2012, this firm's daily volume for equity share trading is at 3,500. Current share price is $3.40, with tangible book value per share at $5.26. P/E is at 15.45, market capitalization is at $25.26 million, and management insiders have bought shares over the last month that have placed this company in the top 20% of peers with similar attributes with respect to this metric.
The 52-week range for this stock is $1.85-$4.30. With 7.4 million shares outstanding (of which 0.28% is held by institutions), NSBC has historical volatility of share price of about 82.1%. Investors should be aware that during the most recent quarter, 17,000 shares were bought in insider trading transactions. Though EPS growth annually has decreased over the last 5 years, revenue growth has increased by about 1.02% over the same period, and shares may be appropriately positioned now to bounce back.
Potential investors should be aware, though, that NSBC recently announced its intent to deregister from the SEC, citing the JOBS Act - this should also point to expense cuts and potential EPS accretion into future quarters:
The Company is eligible to deregister because it has fewer than 1,200 holders of record of its common stock.
The Company's management and Board of Directors made this decision after careful consideration and review of the cumulative costs and pros and cons of being an SEC reporting company. The Company believes that, currently, the incremental cost of compliance with SEC regulations and the Sarbanes-Oxley Act and other reporting requirements do not provide a discernible benefit to the Company and its stakeholders. The Board of Directors noted that in addition to the significant annual cost savings, deregistering the Company's shares also will enable senior management to focus more on the day-to-day operations of the Company, as opposed to the considerable time necessary to manage compliance with SEC reporting requirements.
Larry D. Barbour, president and chief executive officer, stated, "The decision to deregister from the SEC was driven by a desire to achieve substantial annual savings by reducing the accounting, legal and administrative costs associated with being an SEC registrant. Annual savings are estimated to be approximately $150,000 to $200,000 per year. We believe deregistration will not affect trading in our common stock, which we expect will continue to be quoted on the Over the Counter Bulletin Board (OTCBB)."
2) Northern States Financial Corporation (OTC:NSFC) is a multi-bank holding company that operates in the Waukegan-Gurnee area of Illinois. With 125 employees as of the end of 2011, this firm's daily volume for equity share trades stands at 1,250. Price per share is at $0.93, with tangible book value per share at $2.02. Market capitalization of this relatively smaller commercial banking holding company is at $3.94 million, but the management buy criterion puts it in the same category as its peers given above and in my first piece on this issue.
Given the fragmentation of commercial banking, NSFC's position in the market may allow it to take advantage of certain market pressures. Gross profit margin for this firm stands quite high at 59.1%. Though earnings per share were quite negative in 2009, 2010 and 2011 EPS values were much closer to breakeven, perhaps signaling positive EPS results in future quarters.
Investors seeking to perform due diligence on either of these may want to consider their peer institutions in the commercial banking sector, such as M&F Bancorp Inc (MFBP.PK), Princeton National Bancorp Inc (OTC:PNBC), First Security Group Inc (FSGI), Southern Banc Co Inc (SRNN.OB), Southern Conn. Bancorp Inc (SSE), Great Florida Bank (GFLBB.OB), Monarch Community Bancorp (OTC:MCBF), Central Virginia Bankshares (OTC:CVBK), Bank of the Carolinas (OTC:BCAR), Provident Community Bancshares Inc. (OTC:PCBS), and others.
As stated in the previous piece, 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 the reported book value of tangible assets for these firms is for some reason inaccurate. Moreover, the "management buy" criterion adds to the bullish case for each of these; with standing in the top 20 percent of the 1080 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, as I shared before, 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 regulation following the 2008 financial crisis and/or whether the books of companies in the sector fully reflect reality. Compared to major players in the financial services industry 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, all six of these financial equities may be worth the investment, especially given the reasons outlined above. Good luck.