Two Bank Stocks to Buy Now Before Activist Investors Goose Share Prices

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...

In his most recent 13D filing, Stilwell announced that he had acquired additional shares of Naugatuck Valley Financial Corp. (Nasdaq: NVSL) and now owns 9.7% of the company.

In the filing, Stilwell stated "Due to recent developments, it is our belief that the Issuer should be sold in order to maximize shareholder value. We do not believe the value of the Issuer's assets is adequately reflected in the current market price of the Issuer's Common Stock."

Naugatuck is a small, nine-branch savings and loan in Southwestern Connecticut that has been struggling of late as loan interest margins and stubbornly high non-performing loan levels have caused the bank to lose money. They recently entered into a memorandum of understanding with the Boston Federal Reserve that prevents them from paying dividends or buying back shares without permission.

With the stock at less than 73% of tangible book value a sale of the bank should be very profitable for new shareholders if Stilwell is successful.

Stilwell also recently announced that he would be seeking a board seat at Malvern Federal (Nasdaq: MLVF) and intended to encourage management to buy back stock and pay shareholder dividends.

The bank has excess capital as a result if its second step conversion offering back in January and he wants the money used to reward shareholders rather than rapid expansion of the securities or loan portfolio.

Malvern has eight branches and operates in Chester and Delaware Counties in Pennsylvania. The stock currently trades at just 78% of book value so share buybacks would benefit existing shareholders.

A future sale of the bank cannot be ruled out as the locations and valuation are very attractive to potential buyers. It is worth noting that Stilwell is not the only large activist shareholder in the bank as activist hedge fund PL Capital also owns more than 9% of the outstanding shares.

These aren't the only stocks in the financial sector that have huge gains ahead - just check out these stocks to buy now that will soar thanks to a coming wave of retiring baby boomers...

About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

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