Small Banks Look Attractive

 | Aug 13, 2012 | 11:30 AM EDT
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The housing market appears to have finally bottomed, so it should be a logical time to allocate more funds to the financial sector, which should be one of primary beneficiaries of a sustained housing recovery. The challenge is to find financial firms that will not be weighed down substantially by Dodd-Frank, are not exposed to Europe, don't have proprietary trading operations that could blow up, and are not likely to be legislated out of existence or get caught up in the scandal of the month (Libor anyone?).

I think an investor's best bet is to look at smaller "vanilla" institutions, as they should be much less negatively impacted by the complex and fast-changing banking environment. Here are two small banking groups in the Northeast to consider. Both are paying solid dividend yields, sport reasonable valuations and have had recent insider buying.

First Niagara Financial Group (FNFG) provides retail and commercial banking services through 334 full-service branch locations across upstate New York, Pennsylvania, Connecticut, and western Massachusetts.

Four reasons FNFG is solid value play at just over $8 a share:

  1. The majority of the management team and board have purchased over $1 million in new shares in myriad transactions over the past six weeks.
  2. Even after cutting the dividend in half earlier in the year, the yield is still 3.9%, which should put a nice floor under the stock price.
  3. FNFG is selling at the bottom of its five-year valuation range based on P/E, P/CF, P/S and is selling at just 64% of book value.
  4. Despite the worst environment for banks since the 1930s, FNFG actually has managed to grow revenues and earnings in the last five years, no easy feat. Both Deutsche Bank and Jefferies have Buy ratings on the stock.

Valley National Bancorp (VLY) provides various commercial, retail, trust, and investment services through 211 branches in 147 communities in New Jersey and New York.

Four reasons VLY is a long-term bargain at $9.50 a share:

  1. Two insiders bought over 50,000 shares earlier in August.
  2. The stock pays a robust dividend of 5.8%. The company maintained the dividend payout all the way through the financial crisis as well.
  3. VLY is selling at the bottom of its five-year valuation range based on P/E, P/CF, P/S and P/CF.
  4. The stock was just upgraded by Stern Agee in late July and the stock regularly traded above $18 a share prior to the financial crisis.

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