Stocks to Buy Now: Don't Miss This Looming M&A Wave

    Text size

As investors hunting for the best stocks to buy, we often get so caught up in the big names of the day that we miss a powerful opportunity right in our community.

I'm talking about community bank stocks, and they're about to offer you one of the biggest profit opportunities of the next few years.

In fact, patient long-term investors could see profits similar to those enjoyed in the 1990s as banks recovered and consolidated.

Stocks to Buy: Why It's Time for Small Banks

Community banks usually have just a few branches and less than $1 billion in deposits. They have seen their stock prices fall dramatically over the past few years from the peaks reached in the 2006 boom days.

Between 2006 and the depths of the credit crisis, the NASDAQ Bank Index plunged by more than 60% and has not really recovered. Some of the poorly managed ones lost it all and were liquidated by the Federal Deposit Insurance Corp. (FDIC).

Those that are left should benefit from the eventual recovery of the real estate markets - but the truth is most of these banks won't be around that long.

That's because as the credit crisis unfolded legislators and regulators were quick to react - or overreact. They applied new rules and regulation not just to the large institutions that caused most of the problems, but also to the smaller community banks.

With literally hundreds of new banking regulations on the way, many smaller banks simply will not be able to comply and still operate profitably. It will also be difficult for smaller banks to access the capital markets to raise the money needed to grow.

The most logical course of action will be to sell out to a larger institution.

The Looming Consolidation Wave in Banking

The slow recovery has given banks a reason to look to merge with peers or acquire smaller institutions. Loan growth has been, and is expected to be, anemic for some time to come.

In addition, many non-bank financial institutions like hedge funds and business development companies have emerged as lenders to mid-size businesses, an important customer for smaller community banks.

The only way to grow the deposit base and grow earnings for many banks is going to be via merger or acquisition.

We have seen this happen before.

The remaining content is exclusively for Money Morning subscribers. To gain access, enter your email address:

(After submitting your email address the page will refresh with the full article. You will receive a welcome email from Money Morning including the benefits of your free subscription.)