It’s officially time to say goodbye to the “Dr. Doom” era…
You’ll recall that I detailed the nearly 40-year stretch of failing interest rates in December. And I noted that a “brand-new ballgame” was coming, thanks to the Federal Reserve.
Well, this brand-new ballgame just kicked off…
The Fed increased the benchmark federal funds rate by 0.25% last Wednesday.
That might not sound like much. But it was the first rate hike since December 2018. And importantly, it’s the first of six planned hikes this year as the central bank battles inflation.
As you know, inflation is at a 40-year high. And the main tool the Fed uses to fight inflation is higher interest rates. So the rate hike last week surprised nobody.
However, it will take time for investors to fully catch up to the Fed’s actions. This ballgame is still unfolding, after all. And it’s not too late for us to adjust our playbook…
So today, I’ll cast myself as an assistant on Mr. Market’s coaching staff. I’ll add a pair of plays to our 2022 playbook. You’ll want to consider these stocks for the months ahead…
Let’s begin with a basic look at why interest rates matter to banks…
Banks collect money (deposits) from investors and pay out interest at short-term rates. Then, they lend the money to others and earn long-term rates.
The difference, when expressed in percentage terms, is called the “net interest margin.”
But that doesn’t mean we should just pick any bank stock with a solid net interest margin for this new ballgame. As I wrote on February 2, some banks are less fitting than others…
Big increases in expenses can hurt banks. More specifically, too many costs related to bad loans can turn banks into poor investments. We’re seeing that play out in today’s market…
I recently used our Power Gauge system to dive deeper into 318 bank stocks. Today, the Power Gauge only ranks 93 of these stocks as “bullish” or “very bullish” – about 30%.
None of the big-name banks are among the stocks rated “bullish” or better. I’m talking about companies like JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC).
As it turns out, a lot of regional banks offer better opportunities right now…
Now, “regional bank” doesn’t mean it’s a small bank. It just means the bank sticks to a smaller area than the big-name banks that often stretch across the entire country.
Sometimes, regional banks operate within a single state. Other times, they focus on an area that includes parts of neighboring states. The key is that they’re small-scale operations…
A regional bank doesn’t always compete (that is, pay higher rates) among a huge pool of prospective depositors. Rather, it focuses on a deeper knowledge of local business conditions, borrower relationships, and creditworthiness than the big-name banks.
As a result, expense-related setbacks are less likely to undermine regional banks’ net interest margins. That’s why they could prove to be key plays in this brand-new ballgame.
Specifically, you should consider adding two regional banks to your playbook today…
The Power Gauge is “very bullish” on Allegiance Bancshares (ABTX). This Houston-based bank is merging with a rival to increase its share of the strong, oil-influenced local market.
Our system currently ranks CVB Financial (CVBF) as “bullish.” CVB is also merging with a competitor. It aims to boost its presence in the flourishing Southern California market.
In short, both of these regional banks are in a great financial position right now…
They both have more than enough reserves to cover any nonperforming loans. And they both stand to benefit well from rising rates throughout the rest of this year and beyond.
So if you’re wondering which plays to run as interest rates rise… I’d start here.
Good investing,
Marc Gerstein
