It's a busy world out there right now. I was talking with some macro friends this morning. Among the topics that came up were, of course, oil, the snap elections in Japan, Vladimir Putin's next likely move in Eastern Europe, and the potential for bond buying by the ECB to restore economic growth. That's a lot to think about, and that's only the first part of the process. These big-picture folks have to figure out the markets might react to all this news and possible news flow. It is enough to give me a headache early in the day. While I am a news junkie and follow all of these developments, I would hate to have to use my opinion of the developments to frame my trading day.
I prefer to just stick with cheap stocks. Right now, that involves mostly community bank stocks. There are not a lot of safe and cheap stocks outside this sector. This has always been my favorite sector, and right now, the stocks have some healthy tailwinds. In its recently released banking outlook for 2015, Keefe, Bruyette and Woods said that the small to midcap banks remais poised to continue to take market share from their larger brethren, and to grow at a multiple of GDP. The brokerage and research firm also noted that building M&A momentum primarily, but not exclusively, on the smaller side was an additional consideration for the group.
One easy way to find those smaller banks that may be poised for higher prices is to look for banks trading at a low price-to-book-value ratio, and have seen recent insider cluster buying. We know form academic studies and practical experience that when three or more officers and directors of a company buy stock within a short period of time, it is likely that the stock would go up over the next year. Combined with the small bank stock tailwinds, this can give us a recipe for investment success in 2015.
MBT Financial (MBTF) is a small 24-branch bank located in Monroe Michigan, with $1.2 billion in assets. The bank has a strong balance sheet with equity-to-asset ratio of 10.27, and non-performing assets are just 1.27% of total assets. In the past couple of months, insiders have been heavy buyers of the banks shares. Director James Miller bought 165,000 shares of the bank, and CEO Douglass Chapin picked up an additional 6,060 shares. CFO John Skibski also increased his stake recently. The bank has been focused on improving asset quality for the last few years, and it has achieved remarkable results in disposing non-performing assets and cleaning up the loan portfolio, MBT financial is now well-positioned to benefit from the tailwinds of an improving economy and improving industry conditions. The stock is clearly a bargain, as the shares trade at just 84% of book value.
Community Bankers Trust (ESXB) is the holding company for Essex Bank, a Virginia state bank with 14 branches in Virginia and six in Maryland. The bank currently has total assets of about $1.1 billion. Last year, the bank sold its Georgia branches and refocused on the mid-Atlantic region opening new branches in Annapolis, Maryland and Richmond Virginia. Management has done a fantastic job of cleaning up the balance sheet over the past three years, and non-performing assets are just 1.62% of total assets, down from 5% three years ago. The equity-to-asset ratio is 10.2, so it has adequate capital. The bank is growing its loan portfolio, and it is well-positioned to grow in 2015. Insiders like the potential for the stock, as several have been buying shares recently. Director Richard Bozard has picked up an additional 33,544 shares of Community Bankers Trust in the past month, while fellow director Eugene Putnam purchased 5,000 shares of the bank. Another director, Gerald Barber bought 2,000 shares of the bank in the past two weeks. The stock trades right around tangible book value at the current price, and the folks running the bank think it will go a lot higher in the years ahead.
Focusing on the small regional and community banks can help insulate you from the flood of macro and political news that moves the market. The sector has had a decent year in 2014, and 2015 looks even better. Given the lack of opportunities in the broader market, much of my focus will continue to be on these "trade of the decade" powerful little stocks. Insider buying can help identify potential bargain with outsized profit potential.