The easiest spot to find a great industry is at the top of the Zacks list. That’s as lazy as top-down analysis gets. Doing it that way also has an obvious defect. You are not the first guy to look into these stocks. In fishing terms, you are throwing your Bass Plug at the most obvious log, in the middle of the best lagoon. These spots are typically fished out. On the other hand, it provides a valuable filter to begin your search.
Case in point: Banks-West is a 35-company strong Finance industry sub-sector. The Zacks Industry Ranks system currently pegs this industry group at #2 out of 265 industries (top 1%), while Finance is #1 out of 16 sectors Zacks ranks.
These small- and mid-cap banks operate multiple business lines in one of the faster-growing regions of the country. Demographics are supportive. Unemployment rates remain low, keeping loan default rates down and deposits up.
Their latest quarterly earnings-per-share (EPS) reports show active investment. Money is indeed flowing into Western bank accounts, and then out (profitably) into these Western communities. EPS beats are consistent across this regional banking niche.
What’s not to like, right? The one-year return for this attractive regional bank sector rose a whopping 52% during the last year. That scares me as a value investor. When buying any smaller regional bank, valuation has always been a key to finding any remaining share price appreciation.
After a big industrywide share price run, where do you find the value?
Below are three recommendations (see “Go west, young investor”). All these picks get a Zacks #2 Rank “buy” rating. The Zacks #1 Rank “strong buy” stocks looked too pricy to me.
- Zions Bancorporation (ZION): This is a Zacks #2 Rank “buy” stock with a VGM score of B, based on a value score of B and a growth score of C. It doubled during the last 12 months, but its P/E is a reasonable 21.14.
- Umpqua Holdings (UMPQ): This is a Zacks #2 Rank “buy” stock with a VGM score of C, based on a value score of A and a growth score of F. UMPQ underperformed the rest of the sub-sector and could catch up. Its P/E is 17.23.
- Bank of Internet – Bofi Holding (BOFI): This is a Zacks #2 Rank “buy” stock with a VGM score of A, based on a value score of A and a growth score of C. While it matched the overall sector returns last year, it also has a reasonable P/E of 15.19.