“Take a simple idea and take it seriously.”
I wish I had said that but, it was Charlie Munger of Berkshire Hathaway Inc. (NYSE:BRK-A).
Charlie is the Oscar Wilde of Finance in that there seems to be a Mungerism for every occasion, but this is my favorite and probably the most important of them all, “Sometimes we overcomplicate the investment process, and it hurts our long-term returns.”
Applying the concept of taking simple things seriously works very well when it comes to bank stocks. It doesn’t need to be rocket science by any stretch of the imagination.
It occurred to me some years ago that a portfolio of bank stocks that traded at low Price-to-Earnings ratios, and paid a reasonably high dividend, would be a pretty profitable endeavor. As it turns out, I was almost right.
Outperform Index Funds by 3,962%
Just this strategy, rigidly applied, would have outperformed all mutual funds and most hedge funds over the previous 20 years. It’s the best thing you could have done with your money in that time.
In fact, it beat the so-called intellectual elite and their index funds by a factor of 12.
Over the last 20 years, my simple bank stock approach would have turned a $10,000 investment into $431,500 today. Those who followed the Professors with that same investment and bought an index fund would have just $35,300 in theirs.
That’s a 20.7% annualized return. That’s the kind of return that made Warren Buffett one of the three richest people in the world.
Now I can already hear all the uproar about how badly you would have done during the credit crisis and market meltdown, and how risky bank stocks have been over the last decade…
Make all the noise you want, because it’s just not true.
Yes, you would have seen a significant decline in your account, but not as much as the indexers and other mutual fund owners would have experienced.
Even better, less than two years after the dust settled and the market bottomed, your account would have been back to all-time highs.
If we use portfolio Beta, or how much the strategy moved up or down based just on stock market movements, we find that this simple, yet effective bank stock portfolio is less than half as risky as owning the S&P 500.
Owning high yield undervalued bank stock allows you to have your Wall Street cake and eat it, too.
Let’s look at two of the banks that currently qualify for the portfolio to give you some idea of how diversified this portfolio is in real life.
This West Coast Bank Hits All the Marks
PacWest Bancorp (NasdaqGS:PACW) is located in Beverly Hills, California. They have 80 branches with about $26 billion in total assets.
PacWest caters to small and mid-sized businesses across the United States.
They focus on what management calls “relationship-based business banking” to small, middle-market, and venture-backed companies nationwide.
They also provide banking services for venture capital and private equity firms across the country, as well.
PacWest currently trades with a PPE of just 10.9, and the stock yields 6.19% at the current price.
Over the past five years, they have increased the dividend by 17% a year, on average.
Insiders own over 1.4 million shares, so they have more than enough skin in the game to stay laser-focused on growing the bank and moving the stock price higher.
Five Stars for This Bank’s Management
All the way across the country, we find Financial Institutions, Inc. (NasdaqGS:FISI), the holding company for Five Star Bank in Warsaw, New York.
They have 53 branches in Western and Central New York, with about $4.2 billion in assets.
They serve pretty much everybody in their communities, including individuals, governments, and businesses.
They also provide indirect auto loans through a network of franchised auto dealers across their region.
This is a very profitable business, and they are excellent on the credit side, as very few of their car loans are more than 90 days past due.
Bad loans, repossessions, and charge-offs total just 0.13% of assets across the bank – a fraction of the national average for bank their size.
The stock is trading at just 11 times earnings, and yields 3.48%.
They have increased the payout by 5.8% a year over the past five years, so you can expect the yield to increase over time.
The Low PE-High Yield bank strategy builds a portfolio that includes big banks and small banks from all over the country.
There will be business-focused banks, banks that only do single-family mortgage lending, and everything in between.
What all the banks will have in common is that they are undervalued and regulators have determined that they are financially strong enough to pay out their cash in the form of dividends.
Historically it has delivered higher returns with lower risk, and I’m confident it will continue to do so in the future.
Here’s How It Works
Put together a list of bank stocks, regardless of size, that trade with a PE ratio of 12 or less.
Now, filter for those stocks with a dividend yield of 3% or more.
Then buy the 25 with the highest dividend yield.
Every month do the same thing, and replace those that no longer qualify with those that do.
Most months that will mean selling on average one stock and buying a replacement.
If you can’t find 25, then spread your money across the ones that do have a PE of 12 or less, and a dividend of at least 3%.
These are the kinds of opportunities I find and share every week with my readers in my elite trading service, Heatseekers. I use this and my other 14 time-tested winning strategies to help them find the opportunities they need to be wildly successful and have them sleeping easy at night. Like the super-regional bank that’s gained over 7.5% since my recommendation in June, and the materials supplier that’s up over 41% since January.
I’ve dedicated my life to finding only winning stocks with great success. And I’m just as dedicated to helping you do the same. My next recommendation that could help you make those Buffett-esque returns could be released any day now. Read more about how you can reduce risk and increase your gains here.
One of my associates wanted to know why I would give away this simple to use, powerful strategy for free.
It’s simple. I know most folks will simply never use it. The idea of owning bank stocks is boring, and you want excitement and the next big thing.
Some people will try it and abandon ship the first time they have a down month, and go looking for the next foolproof, “goes up every single day and outperforms every single month” idea.
Bon voyage and best wishes!
Maybe one in 1000 will see this powerful idea as the compounding machine it is and put it to work building your retirement fund.
To you, I say welcome aboard! I hope you have some ideas about how to use all that free time you have now that you only need to check your portfolio once a month.
To the Max,