Zacks Industry Rank Analysis Highlights: Chemical Financial, BOK Financial, Peoples Bank of Ohio and Farmers and Merchants

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Dec 09, 2011, 11:07 ET

CHICAGO, Dec. 9, 2011 /PRNewswire/ -- Stocks featured in this week's Zacks Industry Rank analysis include Chemical Financial (Nasdaq: CHFC), BOK Financial (Nasdaq: BOKF), Peoples Bank of Ohio (Nasdaq: PEBO) and Farmers and Merchants (OTC: FMAO).

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Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist, Zacks.com.

Banking on the Community

You have probably never heard of most of these banks on our top regional banks list. Some of them you might recognize if they happen to operate in your town, but it is a fair bet that the names of most of them have never, or at least very rarely, been uttered on CNBC. That, however, does not mean that they cannot be good investments.

This is a group that cries out for a "package approach." None of the banks on either of the lists are large caps, and even the mid-caps are on the small side of the mid cap range. In fact, taking the two lists together, sub-$100 million micro-caps outnumber firms with market caps over $1 billion by 30 to 9. You can create a "synthetic" national bank – one that avoids the regional risk that these banks pose -- by having a portfolio made up of small positions in many of these names, rather than just taking one normal-sized position. Given the thin trading volumes in these names, even an individual investor could impact the price if they tried to take a big portion in just one of these names.

The valuations are for the most part reasonable, and while I don't show the FY2 over FY1 growth on the tables, you can get a good idea of it by looking at how much lower the P/E for next year is relative to the P/E for this year. Most are expecting solid, but not spectacular growth, and you are paying a reasonable price for those earnings. Not rock bottom for the most part, but very reasonable.

Unlike the big guys, most of these firms are free to pay whatever dividends their boards deem appropriate (the TBTF ones need to ask permission from the Fed, and the Fed has not been inclined to say yes for most of them, and should not for quite some time to come). Many of these small-fry banks provide very attractive dividend yields. Most are seeing big increases in their estimates for both this year and next.

However, just as a word of warning, they tend to be thinly covered, so an individual analyst raising his or her numbers for the firm has a much bigger impact on the mean estimate than is the case with the big, well-covered banks. Still, higher earnings will allow these banks to pay higher dividends in the future, so if you do buy them and tuck them away, there is a very good chance that your yield on cost will be much higher a few years down the road than is indicated on the tables below.

The Zacks Rank is however better used as a short-term timing/trading tool, not as a guide towards long term investing. Still, even the longest term investor wants to avoid an immediate drop after he buys, and will enjoy a pop shortly after she puts the order in. The combination of an attractive Zacks Rank, and a low or at least moderate valuation, is what you want to look for.

If you want a bank for your portfolio, think small. A package of, say, Chemical Financial (Nasdaq: CHFC), BOK Financial (Nasdaq: BOKF), Peoples Bank of Ohio (Nasdaq: PEBO) and Farmers and Merchants (OTC: FMAO) probably has just as much upside potential, and a lot less risk, than a single position in Citigroup. You will also enjoy a much nicer dividend stream along the way.

Right now, when it comes to the banks, small is beautiful. If you need size, the oligopoly nature of the credit card business means that Visa and MasterCard should be attractive long-term investments, which have the earnings estimate momentum wind at their backs right now.

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Contact: Dirk Van Dijk, CFA
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