If it feels like you see a bank on every corner when you're driving around, you're right. The United States has roughly had 6,799 FDIC-insured commercial banks as of 2014. For comparison, Taco Bell had 5,604 locations as of 2014.
With so much competition, it's nearly impossible for larger banks to grow organically.
Instead, they have to expand their operations through acquisitions of smaller firms.
And when I hear about bank consolidations, I get excited, because savvy investors get a big payday when they happen...
The BNCL stock price jumped 13% from $16.35 on Aug. 7, 2018, to an intra-day high of $18.60 on the day of the announcement.
With the volatility in today's market, no one would complain about a nice 13% pop in a day.
But there are even bigger potential gains when the big banks buy the smaller firms.
Because of acquisitions like BNCL, the WSFS Financial Corp. stock price is expected to skyrocket 41% in the next 12 months from $37.65 per share to $53.42, according to average analyst consensus from Yahoo Finance.
And bank consolidation is only expected to accelerate in the next two decades.
Most observers think that there will eventually be just 1,500 banks across the United States.
Today, I am going to show you two ways to tap into this consolidation trend.
We're talking about a story that is going to unlock trillions in value in the future.
And we're going to be first to get those juicy returns...
Turning to a Banking Expert to Find the Biggest Gains
Money Morning Special Situation Strategist Tim Melvin specializes in evaluating these companies, picking out the best ones, and waiting for the consolidation to happen.
He has done very well identifying those banks that are likely targets over the years and has made tons of money for himself and his readers along the way.
Here's how it works...
There's a bank across the street from you. It has no debt. It owns the building in which it operates. It owns the land. There is $1 million in the bank - right there in the vaults.
But the market is entirely irrational. Either people don't think there's any way to make a lot of money on bank stocks, they haven't heard of this company, or they don't understand how banks are valued.
So, the market says the bank is worth just $800,000.
That's absurdly cheap. Scaling down the numbers shows how you can buy something that should be worth $1 for just $0.80.
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And then... you wait.
Eventually, the market will correct and value your bank at its true worth, or another bank that's looking to grow will come along and buy it out.
To make sure the deal goes through, they are likely willing to pay more than it's worth.
And that's how you cash in.
Banks have a lot of reasons to consider selling out, and the list of reasons is longer today than it ever has been.
For smaller banks, the cost of keeping up with the ever-growing list of regulatory reports is making it difficult to turn a profit.
On top of that, to compete, you have to offer mobile and digital banking products.
The technology is not cheap.
Neither is keeping all that data and money safe from cyber thieves.
The costs of technology and regulatory compliance are a huge drag on profits, and it often makes sense to sell out to a larger bank that can spread the costs over a much bigger asset base.
This is what Melvin has focused on for more than two decades.
He finds these little tiny financial companies, buys them up, and waits for the market to realize that there has been 50% or more upside in these companies.
After chatting with Melvin, he cued readers in on two companies that tie perfectly into this trend...
A Big Banking Winner Out of the Steel City
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Unless you're a fan of the Pittsburgh Steelers, Penguins, or Pirates, you probably have never heard of WVS Financial Corp. (NASDAQ: WVFC).
WVS is the holding company for Pittsburgh-based West View Savings Bank, a small six-branch operation with about $350 million in deposits in the Pittsburgh area.
And thanks to its location, WVS Financial is a prime takeover candidate...
For a larger bank to enter the Pittsburgh market, it would just be smarter and more cost effective to buy WVS instead of trying to build a local franchise.
It's a company whose operations consist of lending from one primary source: deposits.
We're not talking about a bank that's dipping into the exotic mortgage-backed security business.
We're talking about regular, good old-fashioned lending.
The stock is currently trading for just $0.85 on the dollar based on its price-to-book value of 0.85. The percentage of nonperforming assets is just 0.07%, which is a mere 10% of what the average bank in the United States has.
WVS also pays its shareholders a respectable dividend of $0.32, which is a yield of 2.17%.
Like the 13% pop in the BNCL stock price in 2018, a sale could trigger a similar stock price climb in a short time.
While this is a prime takeover target, it's not the only way to make money from mergers and acquisitions in the banking sector in 2019.
The banks buying the smaller financial firms can also be top buys and unleash massive profit opportunities...
Your Next Double-Digit Winner in the Banking Sector
The other way to make money in banking consolidation is to buy large banks that are very successful acquirers of other banks.
The very best at buying other banks is Home Bancshares Inc. (NASDAQ: HOMB) of Conway, Arkansas, according to Melvin.
Founded in the 1990s by John W. Allison and Robert H. "Bunny" Adcock, the bank has grown from just $25 million in assets to over $10 billion today.
During that time, it has acquired more than 20 banks and spread its operation across the Southeast, all the way into Florida.
Allison has been the guiding light behind the bank's spectacular growth.
He has achieved outstanding results because he wants to buy firms at a price that adds value and increases profits from day one.
Allison is the master of cost control and efficient operations.
He is highly motivated, as he is the largest shareholder of the bank and owns around $100 million worth of stock.
Melvin told me that he would never bet against Allison and his team, and that in a bad market that offers great prices like we see today, it probably makes sense to load up on Home Bancshares stock for a long, profitable ride.
In the next 12 months, Keefe Bruyette & Woods expects the HOMB stock price to climb to $27 per share.
From today's (Jan. 3, 2019) price of $16.49, that's a potential profit of 63%.
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Imagine being able to invest in winning stock after winning stock... then rolling your winnings into more and more stocks, also only heading north.
That would quickly add up to be enough to spend the rest of your life just living on the interest on your winnings.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.