I had to talk myself into writing this article.
I have revealed – for free – two powerful bank stock investing strategies so far.
Putting the details of my third approach on the table with an example is going to cost me money.
Once I reveal a stock to you, I can’t buy the shares for myself because of our strict ownership policies here at Money Map Press, designed to protect readers from front-running and other types of double-dealing we have seen in the word of financial publishing.
Once I put this name out in the world – again, at no cost – this bank cannot be in my personal portfolio.
Nonetheless after pacing about for a bit I decided to go ahead and put this strategy out there for you to use.
Again, most folks won’t because it’s just old, boring bank stocks, and you want to own the next big thing.
If you want to able to brag around the water cooler, or over drinks at the club after 18 holes about the whizbang wonder stock you own, or you need to hear your stocks being talked about on TV and in print to verify your purchases, then this strategy is not for you.
Staying Ahead of the Game
I told you last week that John Allison of Home Bancshares Inc. (NasdaqGS:HOMB) said to me that the key to his success was finding smaller banks that, although financially stable, were not earning high enough returns on investors capital. After all, no one wants to buy a bag of bad loans, or have to add capital to the balance sheets of a bank they acquire.
Home would buy them, then Allison used the size and scale of its balance sheet and the capability of its back office capability to improve those returns.
This strategy allows us to get there first, buy these banks, and then sell them to John and other bankers like him.
The ones that don’t sell are those that figure out how to cut costs and gain size and scale of their own, and those shares tend to go up quite a bit when earnings improve. It’s as close a thing to win-win investing as I have found in over three decades in the markets.
It’s incredibly profitable, returning about 2.5 times the stock markets return over the last two decades.
In the last ten years since the end of the credit crisis, the annual returns have averaged well above 20% a year, nearing the levels reached only by the most legendary of investors and traders.
The strategy is simple: We look for stocks that are trading below tangible book value.
That’s the net worth of the bank, and we want to pay less than that number.
We want banks that are earning a below-average return on assets compared to other banks around the United States.
Once we have a list of qualifying banks, we buy the 25 with the highest return on assets.
This weeds out the money-losing and headed to destruction banks we need to avoid.
Once the portfolio is in place, you’re done with your portfolio for the next three months. Go read, play with the kids, or grandkids. Focus on your business or career. Take a vacation. Do whatever you want because you are not going to touch your portfolio again for 90 days.
With all of that free time, you can read all about the Quantum Loop. It’s a new technology with the power to show us down to the day when a stock will rise, when it will accelerate, slowdown, and burnout. To read more about how the Quantum Loop earned its readers 50% on CSCO and 60% on NEM in less than 24 hours, click here.
At the end of 90 days, you review your portfolio. Sell any banks that now trade above tangible book value and those that have dropped out of the top 25 measured by return on assets.
Buy those that are next on the ROA list until you are back up to 25 bank stocks.
Once again, you are now done for the next three months.
That’s all there is to it.
There is no chart drawing, tape watching, or obsessive consumption of financial news media.
It’s purely mechanical and avoids owning those banks that are destined to fail, so the financial risk profile of this portfolio is pretty small.
As banks continue to consolidate, you are highly likely to get several takeovers at premium prices every year.
It’s not exciting day to day, and there is very little “action.”
Of course, investing done right is supposed to be boring, which is a big reason why most people are so bad at it. You will own some of these stocks for years before getting a takeover bid, or a strong upward price move based on fundamental improvement.
My one caution for you is that you will own a lot of small banks with this strategy. You have to use limit orders, common sense, and patience when buying and selling these banks.
That is very true about the stock I’m sharing with you today.
A Great Target for This Strategy
First Internet Bancorp of Indiana (NasdaqGS:INBK) is a small bank in the booming metropolis of Fishers, Indiana.
They have no branches and do business primarily over the internet.
Their loan portfolio has a strong mix of individual and commercial loans, including an indirect lending business that finances recreational vehicles and horse trailers.
Nonperforming assets are minuscule at just .16% of total assets well below the national average.
The stock trades for just 87% of tangible book value.
Although the lack of branches helps somewhat with cost controls, their asset size still makes it challenging to deal with ever-rising regulatory and technology costs.
As a result, their ROA is just .75%, or about 55% of the national average.
They’ll need to improve that in the near future, or consider selling the bank to someone with a larger asset size to deal with the costs.
A sale of the bank should be worth something between 50-100% of the current stock price right now, in my opinion.
Use a limit order to buy the shares if you are so inclined. You will almost certainly regret a market order for shares of First Internet.
This is one of the lowest risk, best-performing stock strategies I have ever discovered.
It is highly unlikely that any of the stocks will show up on CNBC, but many of them will be on the top performers list on the day they get a takeover offer from a larger bank.
Investing in small banks is boring. The profits from doing this are not.
To the Max,