While noting that earnings reports from the bigger banks have been somewhat weak, he says smaller banks, including community banks, tend not to have exposure to higher-risk loans, have largely avoided involvement with the energy sector, and are seeing decent growth in loans and deposits. A challenge to smaller banks remains net interest margins, but he says most smaller banks have been adept at dealing with the prevailing low-rate environment. In addition, he notes, insiders continue to be buyers.
Tim is so strongly impressed by smaller banks, he says, "Now is probably the best environment to buy community banks since the early 1990s."
Tim is worth listening to, which is why I checked how my guru strategies currently view smaller banks. Like Tim, they like these institutions. These are automated strategies I created based on the strategies of well-known investors. Smaller banks are currently seen by these as strong investment opportunities.
Here are two smaller banks worth your attention:
Enterprise Financial Services (EFSC), operating as Enterprise Bank & Trust, provides commercial banking and wealth management services via over a dozen branches in the St. Louis, Kansas City and Phoenix markets. Its assets total more than $3.5 billion. The guru strategy I base on the writings of Peter Lynch is a strong proponent of buying this bank's stock. The P/E/G ratio, which is price-to-earnings relative to growth, is this strategy's most important variable, as it measures how much investors are paying for growth given the current stock price. A P/E/G of up to 1.0 is acceptable and below 0.5 is considered extremely favorable. Enterprise is near extremely favorable territory with a P/E/G of 0.55. In addition, for a financial institution, the strategy wants to see an equity-to-assets ratio of at least 5% and a return on assets of at least 1%. Enterprise surpasses these minimums with an E/A ratio of 10% and a return on assets of 1.15%.
Operating under the community bank moniker Centennial Bank, Home BancShares (HOMB) has 146 branches in Florida, Alabama and Arkansas, and over $9 billion in assets. Like Enterprise, Home is a Lynch-strategy favorite. It has a nice-and-low 0.61 P/E/G, and strong numbers for E/A ratio and return on assets of 13% and 1.76%, respectively.
Tim likes the community bank sector, as do I, and my guru strategies favor these two banks. These are strong reasons to buy these stocks, even if you personally bank elsewhere.