The Carver Bancorp Stock Squeeze Is Over - Buy First Horizon Instead

Carver Bancorp stock popped 300% last week after a short squeeze forced the stock higher. Now that shares have pulled back to around $20 while short interest is still high, is CARV still a buy?

Not likely.

Shares of Carver Bancorp Inc. (NASDAQ: CARV) were trading at about $10 a share before the Internet speculators got involved in the stock. At one point, they had driven the stock up to over $40 a share.

More than 50% of the float in Carvers was sold short before the squeeze began last week, and the traders targeting short squeeze stocks noticed the sizeable short interest and piled into the stock.

The stock has since dropped down to $20 a share but still trades higher than the shares have traded in the last decade.

That might tempt investors to jump in, hoping for the stock to push back to $40 a share again.

But that's unlikely. We'll show you why.

Even better, we'll show you a bank stock you actually want to own...

Why Carver Bancorp Stock Popped - and Why It Won't Again

Carver Bancorp is the holding company for Carver Federal Savings Bank in New York. It is one of the largest African-American-operated banks in the United States. The bank is headquartered in Harlem, and its seven branches and four standalone ATM centers are located in low- to moderate-income neighborhoods.

There is a lot to like about what Carver has done to help bring banking and economic opportunities to lower-income communities, but it's not a great investment right now. The stock is simply not a buy at these levels.

Carver Bancorp is not profitable. It does not pay a dividend. The bank should probably be selling at a discount to its $8.28 book value, not at the massive premium the shares command after the price manipulation over the last week.

This is the second time traders have targeted CARV stock, as they pushed the stock above $25 last summer before the shares collapsed back to earth.

This is a bank, not a tech stock or beleaguered movie theater chain, so it's going to sink back to the proper valuation levels before too much longer.

There's certainly an allure to squeezing hedge funds who are short stocks. And you can even make a quick buck if you're one of the first in.

But there's an easier way to make money in this market. You don't even have to leave the banking sector.

Investors focusing on banks with low price/earnings ratios and high dividend yields will beat the returns of traders looking for short squeeze stocks. Over the years, that is a proven combination that delivers high long-term returns.

Here are two better stocks to buy...

First Horizon Is a Better Stock to Buy Than CARV

First Horizon Corp. (NYSE: FHN) is based in Memphis, Tennessee, and has 500 branch locations in 23 states. The bank has been around since 1864, so it has seen a crisis or two and emerged successfully every time. The bank has total assets of approximately $87 billion.

Last year, as the pandemic raged, First Horizon merged with Iberia Bank in Louisiana. That grew the bank to current levels from less than $50 billion in assets. The transaction made them one of the premier banks in the American Southeast, one of the fastest-growing regions in the country.

First Horizons Loan portfolio is focused primarily on commercial lending, with over half of all its loans either commercial and industrial loans or commercial real estate loans. In spite of COVID-19, it has few nonperforming assets as they are about 0.7% of all assets.

First Horizon is a well-run bank that is trading for less than nine times earnings. It's also an excellent dividend stock with a yield over 3.5%. First Horizon has an excellent track record of dividend increases and has raised the payout by an average of 22% annually over the past five years.

First Horizon has a market cap of about $8 billion. At that level, it is an attractive target for a larger bank that wants instant expansion into the southeastern portion of the country.

The bank reports earnings this week, and we would use any short-term weakness to load up shares of Frist Horizon.

Another strong contender that beats the pants off Carver Bancorp is Northrim BanCorp Inc. (NASDAQ: NRIM) in Anchorage, Alaska. It has 21 offices across Alaska. The bank has total assets of just $2.3 billion.

Northrim's loan portfolio is also heavily concentrated in business lending. Like the folks at First Horizon, Northrim's bankers are very good at their jobs. As a result, nonperforming assets are just 0.88% of all loans at the bank.

Northrim opened its doors in 1990. Alaska saw 13 banks fail during the S&L crisis, and the bank's founders wanted to build a solid financial institution built to stand the test of time. They have succeeded in building a strong, profitable bank.

Because of their customer-focused approach to banking, Northrim was the leading processor of PPP loans last year. All told, the bank processed 5,000 PPP loans, totaling $580 million.

There is nothing fancy about the Northrim story. It's just an excellent bank trading at six times earnings with a 3.5% dividend yield. The dividend has been increased by an average of 14% annually over the past five years.

There are only five banks in Alaska. A larger bank looking to expand into the state would have to consider Northrim an attractive target. Even without a takeover, this bank should provide solid total returns for a very long time.

Skip the frenzy over Carver Bancorp stock and load up on these long-term plays instead. You'll be glad you did.

Are These "Toxic" Stocks Lurking in Your Portfolio?

Almost no one realizes, but some of the most dangerous, portfolio-wrecking stocks are also some of the most popular picks on the market.

Our chief investment strategist is going live and shining a light on the specific stocks that should be nowhere near your portfolio.

In this fast-paced lightning round event, he'll also detail the stocks that every investor in the world should have in their portfolio right now.

This event could revolutionize how you make money this year. Watch now...

Follow Money Morning on Facebook and Twitter.