This Strategy Outperforms Nearly Every Mutual Fund in the Country – with a Lot Less Volatility

This week, I’m packing my bags and heading out to Phoenix, Arizona to attend the Bank Director Magazine ‘Acquire or Be Acquired’ Conference at the Biltmore. It’ll be two fun-filled days of sitting around with bankers talking about bank takeovers.

While that may not sound like everyone’s idea of a party, it’s one of my favorite events of the year.

It’s no secret that I love small bank stocks; community bank stocks have been the bedrock of my portfolio for decades now.

There are several ways to make tons of money in bank stocks. And today, I want to talk about a bank stock strategy that outperforms pretty much every mutual fund and hedge fund manager in the country with a lot less volatility.

Here’s how…

The Secret Formula

When I was a broker, selling these little gems to my customer base of high net worth clients, institutions, and hedge funds was a huge part of my income every year.

It was a rare win-win-win situation: I got paid well to sell the shares, the firms made good money on the deal, and the clients ended up making tons of money as the consolidation wave continued to roll through the industry.

Over the years, I’ve learned to model banks in several different ways to develop strategies that help you earn outsized profits in bank stocks and help sidestep any major sell-offs that might occur in the stock market along the way.

I read hundreds of bank SEC reports and track activists and insiders very carefully, and I use all that data to develop quantitative strategies that can make you more money in plain, old, boring bank stocks than any trading formula or secret I have ever come across in my more than 30-year career.

Now, here’s that strategy I mentioned earlier…

Look for small banks with market caps of under $5 billion that trade for less than 15 times earnings. Now select only those stocks that had insider buying in the previous three months.

Once we have that list, we will select just the 20 stocks with the highest dividend yield. Every three months, we will review that list, sell any that no longer qualify, and replace them with new banks that make the cut.

Then you can do nothing for a year and repeat the process. If you want to be more hands-on and aggressive, you can check the portfolio and rebalance quarterly, which should add a few percentage points to the overall return.

A lot of the banks that this strategy produces will be smaller, and for obvious reasons, I save them for my premium Heatseekers service, but I do want to share one with you today. (Click here to see how you can become a Heatseekers member today and gain access to these small banks with big win potential.)

If You Have to Own Only One Bank, Choose This One

This bank is one I’ve talked about in the past – and truthfully, if you only buy one bank in your lifetime, it should be this one.

PacWest Bancorp (NasdaqGS:PACW) is based in Beverly Hills, California, and has 74 branches located in California, with one in Denver, Colorado, and another in Durham, North Carolina. It focuses on business banking to small, middle-market, and venture-backed businesses in the United States.

It’s the venture business that I find the most exciting. It develops relationships with startups, their executives, and employees, and it provides banking services to both the companies and those that work there.

The bank allows you to have a stake in startup companies without the risk of owning startups. The loans are all collateralized, so even if the company should fail, the bank gets its money back.

PacWest is very good at business banking. The nonperforming assets ratio is just 0.42%, well below the national average.

They also have plenty of capital as the equity-to-assets ratio is currently 19.51, so they have more than 50% capital on hand than the average bank in the U.S.

Officers and directors have plenty of skin in the game. The CEO and other executives are required to own a multiple of their salary in PacWest shares. Collectively, the insiders own over $1.4 million shares of the bank.

PacWest is one of the highest yielding banks in the country, with a dividend yield of over 6%. In spite of the potential for growth from the venture capital banking relationships, the stock is trading at just 9.9 times earnings.

It is also priced below book value right now, so the stock is a huge bargain at the moment. The CEO and Chief Operating Office know a bargain when they see one and were buying shares of the bank in December right around current prices.

The moral of today’s story is this: If you’re not buying bargain bank stocks, you’re leaving money on the table. Don’t make that mistake.

To the Max,

Tim Melvin

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