Financials are on an upswing as of late, and have a strong chance to overtake technology and once again become the most valuable sector in the S&P 500.
The Big Four banks often get the most attention from investors and experience the most volume, but there are thousands of stocks to choose from in the financial sector, and many great banking stocks still out there. The question is, of course, which ones are worth investing in.
After the Great Recession some investors are understandably leery of investing in banks, but not all banking stocks are prone to the volatility of highly leveraged, highly complex megabanks. Regional bank stocks tend to have strong roots in basic, fundamental banking, and can be stable and quite healthy, even in economic downturns. As interest rates continue their rise that began earlier this summer, banks can expect to reap nice profits.
To find the banks trading on the American market with strongest fundamentals, we applied the following four pieces of criteria to every bank stock on the market:
1) The company has a P/C and P/B greater than 1
It is important for finance companies to have strong book value and cash in addition to validation of these assets by the market. As a result, a P/C (profit to cash ratio) or P/B (price to book ratio) of 1 should be a minimum “floor” for investing.
2) The bank has an operating margin greater than 25%
Operating margin shows how efficiently a company is operating is business after a good is sold. Gross profit-operating costs. The operating margin is more appropriate for banks because the costs associated with operating are much more significant for a bank than the cogs.
3) The bank has an ROI greater than 25%
Return on Investment, or ROI, shows how well a company is using its invested capital. Since banks are essentially made up of all invested capital, this is a very important statistic.
4) The bank is a mid-cap or larger
Banks with a designation of “mid” market capitalization have a valuation of at least $2 billion. They tend to be slightly less volatile than small and micro-cap “penny stock” banks.
There are currently four publically-traded banks in the US that can answer “yes” to all of these questions, and thus can be considered to have strong fundamentals for a regional bank:
First Republic Bank (FRC)
This San Francisco-based bank has 59 locations, with the majority located in Northern California and a dozen located on the Eastern seabord. The bank has been buoyed by rising home prices in San Francisco, which is currently the fourth most expensive city to live in in the country.
First Republic is up 32.22 percent on the year to hit $43.83 a share.
Bank of Hawaii Corporation (BOH)
This Honolulu, Ha.-based bank is Hawaii’s second oldest bank, and has been in operation since 1897. The bank is unique in that it has locations in American unincorporated territories, with locations in Guam, Saipan, and Palau.
Bank of Hawaii is up 20.21 percent on the year to hit $54.89 a share.
First Citizens Bancshares Inc. (FCNCA)
First Citizens Bank (and its subsidiary IronStone) services the Southeastern United States, with 493 locations spread out over 17 states. The company was founded in 1898 under the name of Bank of Smithfield.
First Citizens is up 24.61 percent on the year to hit $208.73 a share.
East West Bancorp, Inc. (EWBC)
East West is a California-based bank that operates predominantly in California, with scattered branches in New York, Georgia, Massachusetts, Texas and Washington. The bank is popular with Asian immigrants in te US, and has several locations in Hong Kong and China.
East West is up 39.26 percent on the year to hit $31.04 a share.