I’m going to prequalify this article by excluding big banks, multinational banks, and that sort of thing. Those banks are part of Wall Street. Even if they seem outside the Wall Street realm, if their market capitalization exceeds $50 billion, just cross it off your list. For most purposes, if it exceeds $10 billion, it should NOT be a very important part of your portfolio. That said….
Lots to unravel here, but I’ll try:
First, small banks are unusually safe. They rarely have the risk of other stocks and are much more dependent on local economics. That said, never put all eggs in one basket, so owning a wide variety is much better than just a few. Good news, they are ideal for small investors who only want to own 100 to 500 shares or even smaller amounts.
Second, they are so stable they can very often be held for decades (at least two.) That lowers transaction costs to zero.
Third, under most circumstances they are steady, albeit slow growers. At times, they can grow quite quickly, which brings me to my current recommendation.
In addition to growth, they fluctuate in valuation quite a bit. This is “relative” valuation. As Warren Buffet said, more or less, “In the short term, the market is a voting machine. In the long run, it is a weighing machine.” Meaning: in the short term it’s about popularity; in the long run its about results (earnings, growth.) Right now, I think banks are CHEAP, and on the cusp of faster GROWTH, AND will enjoy an increase in VALUATION. All of which adds up to very good returns on relatively safe assets.
And dividends: banks are notable for their tendency to raise dividends regularly. Most will do this if they can. They have a strong tendency to regularly return capital to investors. Unless they see unusual opportunities to invest capital elsewhere, they will raise dividends AND buy back stock.
My recommendation is a suspicion that we are about to enter a period of prime conditions for banks: higher interest rate spreads, some inflation, continued growth in Main Street America.
Interest rates go through very long fluctuations. Very long. Give or take 40 years. We are nearing the point where interest rate bottom and trend higher. That’s good for banks. It is less so for other industries, and there will likely be some shift in institutional money toward banks.
Look at small, local banks, especially those with market capitalization of less than $250 million. Check out their “tangible book value,” you can call the bank and ask them what it is. The closer their book is to current stock price the better. Even better if it’s below the current stock price. Avoid if the stock price is over 1.5x tangible book.
That is all. Questions are welcomed.