One of the most exciting long-term opportunities right now for stocks to buy involves the smaller regional and community banks – which is why activist investors have flocked to the industry this year.
These banks were hit hard during the credit crisis and economic slowdown of the past five years and have been slow to recover. Earnings growth has been sluggish – even though credit conditions have improved and real estate markets show signs of stabilizing.
There simply is not robust loan demand right now and the very low interest rates have compressed net interest margins at most banks. Higher regulatory and compliance costs have also eaten into profit margins.
This has led to many of these smaller banks still trading at low valuations. There are literally hundreds of banks trading at or below their tangible book value right now.
The good news for investors: this is eventually going to induce a wave of consolidation activities.
Many of the smaller banks will eventually be forced to seek a buyer as the costs of doing business have simply become too high to earn satisfactory returns. Larger banks, in search of better earnings, will prefer to choose "growth by acquisition" instead of organic growth as they wait for economic conditions to improve.
This looming M&A boom is where the huge gains come, which is why the industry is getting so much attention right now…
Bank Stocks to Buy Now: Following a Successful Leader
This combination of undervalued banking assets due to a lack of earnings and momentum along with favorable conditions for consolidation has attracted several activist investors to bank stocks.
These investors take large stakes in smaller banks and push management to either revive profitability or sell the bank outright. Since they are buying the shares below book value and most takeovers occur well above book value, this is proving to be a very profitable process.
One investor with a long track record of successful activism in bank stocks is Joseph Stilwell of Stilwell Value Partners.
He has been involved in bank stocks for many years and since 2000 has filed 48 13Ds indicating activist positions in small banks. He has been successful in advancing change or sale in many of these stocks.
Stilwell has been very active in the past year as he moves to take advantage of favorable conditions in the industry.
Activist activity like Stilwell's will likely increase among the small banks in the second half of the year and well into 2014 – creating very profitable opportunities for investors looking for stocks to buy now.
Investors would be wise to track the movements of the larger funds and investors in this sector as there will be an enormous amount of money made in the next five years from bank M&A. Investing alongside successful activists will increase you odds of gaining more than your fair share of the profits.
Here are two bank stocks to buy now that will deliver for investors if Stilwell gets his way…