In this article, we will take a detailed look at Insiders are Buying These 10 Undervalued Bank Stocks. If you want to skip our detailed analysis and see the top 5 stocks in this list, click Insiders are Buying These 5 Undervalued Bank Stocks.
Warren Buffett is often asked about his secret of spotting great businesses in plain sight. His answer almost always talks about spending hours and hours reading company reports. If you read carefully and pay attention, according to Buffett, you can find a business’s strengths and weaknesses in its annual reports. But can an average investor really start from the beginning and pour time and resources in finding undervalued stocks just by reading reports? Amid a huge influx of news, events, data points and analyses, it has become extremely difficult for an average investor to find undervalued stocks to invest in.
Finding Undervalued Stocks by Keenly Watching Insider Activity
Following insider trades is one of the ways you could increase your chances of spotting stocks trading below their intrinsic value. In a research paper titled Aggregate insider trading: Contrarian beliefs or superior information? researchers Xiaoquan Jiang and Mir A. Zaman talk in detail about how insiders sometimes act as contrarian investors, going against the market by buying or selling their company shares when they see big/irrational changes in stock prices. The research said that “noise” traders can sometimes drive a stock’s price away from its intrinsic value. When insiders perceive a difference between the true value of their stock and market value, they may make moves and buy the stock in question. The research paper also cites important research by Konan Chan, David L. Ikenberry and Inmoo Lee, who talked about evidence showing how insiders respond to the market mispricing stocks by repurchases. Their paper, titled Do managers time the market?, cited a survey in which two-thirds of the surveyed CFOs said that the extent to which their stock is mispriced is an important factor in issuing equity.
Timing The Market with Insider Activity?
But does it make sense for an average investor to pay attention to insider trading activity with an intention to make profit? In their research paper titled Are Insider Trades Informative? Josef Lakonishok from University of Illinois at Urbana-Champaign and Inmoo Lee from Korea Advanced Institute of Science and Technology processed insider stock trading activities for securities listed on NYSE, AMEX, and Nasdaq during the 1975–1995 period. They observed that insider trading activity, despite the attention and buzz it creates, does not cause big stock price changes “around the time of insider trading or around the reporting dates.” The researchers said this could bode well for an average investor who could track insider buying and selling activity and time the market. They also said insider activity around small-cap companies is more informational when compared to large-cap companies since bigger companies are often priced efficiently:
“However, we find that insiders’ trades are informative for longer investment horizons, suggesting that the market underreacts to this information. Aggregate insider trading seems to predict market movements and could be used as a tool to time the market, as previously documented by Seyhun (1988, 1998). Insiders are definitely contrarian investors, but insiders are better at timing the market than simple contrarian strategies. When insiders are optimistic, markets do well, and when insiders are pessimistic, markets do poorly, with an annual spread in returns between the two states exceeding 10%. Insiders are doing a better job in predicting aggregate movements of small companies than of large companies. For individual firms, insiders’ activities also predict stock returns. Before controlling for size and book-to-market effects, firms with extensive insider purchases during the prior six months outperform companies with extensive insider sales by 7.8% over the next 12 months. After controlling for size and book-to-market effects, the spread in returns decreases to 4.8%. The usefulness of insider trading activity depends on company size. Consistent with previous work, we find that large companies are priced more efficiently than small companies. Hence the biggest potential benefit of exploiting insider trading activity is in the smaller companies.”
Bank Stocks in the Spotlight
Bank stocks like JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC) are in the limelight as investors look beyond the Magnificent Seven group of stocks to diversify their portfolios. The SPDR S&P Bank ETF (NYSEARCA:KBE) is up 23% over the past six months and 1.49% year to date through May 6. Financial Select Sector SPDR Fund (XLF) is up 8.3% in 2024 through May 6, compared to SPY’s 8.8% gain. Bank stocks have been reporting earnings over the past few weeks, impressing Wall Street on several counts. In the week ending April 19, 15 out of the 20 XLF ETF constituent companies that reported earnings beat estimates.
Methodology
For this article we first used a stock screener to identify bank stocks trading with PE ratios below 15. From these stocks we picked 10 stocks with significant insider buying activity over the past two weeks. Why is it important to see what insiders are doing? Insider Monkey’s monthly newsletter and portfolio that focuses on activist hedge funds, insider trading and stock picks from hedge fund investor newsletters and conferences returned 199.2% between March 2017 and March 12, 2024 and outperformed the S&P 500 ETFs’ 144.9% gain by more than 54 percentage points.
10. Midwestone Financial Group Inc (IOWA) (NASDAQ:MOFG)
Number of Hedge Fund Investors: 3
Midwestone Financial Group Inc (IOWA) (NASDAQ:MOFG) CEO Charles Reeves on April 30 piled into 1,000 Midwestone Financial Group Inc (IOWA) (NASDAQ:MOFG) shares at $20.72 per share. Since then the stock has gained about 6%.
Last month, during its earnings call, Midwestone management talked about important business insights:
“In addition, we recorded a negative mortgage servicing right valuation of $368,000 and incurred non-merger-related severance costs of $261,000. Adjusting for these items, adjusted net income was $7.2 million or $0.46 per diluted common share. Net interest income increased $2.2 million in the first quarter to $34.7 million as compared to the linked quarter, due primarily to higher earning asset volumes and yields, partially offset by higher funding cost and volumes of interest-bearing liabilities. Loan interest income in the first quarter of 2024 included $1.2 million of loan purchase discount accretion, $458,000 of which was attributable to the bank of Denver acquired loans. The accretable purchase discount for the Bank of Denver loans was provisionally measured during the first quarter at $8.2 million or 3.8% of acquired loans.
We expect to recognize that discount in loan interest income over the 3.1 year weighted average portfolio life. Our tax equivalent net interest margin increased 11 basis points to 2.33% in the first quarter as compared to 2.22% in the linked quarter as asset yield increases outpaced funding cost increases. Specifically, earning asset yields increased 20 basis points, partially offset by a 10 basis point increase in our funding costs. The cost of interest-bearing deposits grew much more modestly, up only 6 basis points quarter-over-quarter compared to the 34 basis point increase we experienced in the prior quarter. This outcome was a key driver in our net interest margin improvement. Non-interest income in the first quarter increased $5.9 million due primarily to the $5.7 million net loss on our security sale in the fourth quarter of 2023, which did not recur in the current quarter.
In addition, wealth management-related revenue increased $310,000 from a linked quarter. Finishing with expenses. Total non-interest expense in the first quarter was $35.6 million, an increase of $3.5 million or 11% from the linked quarter. The first quarter’s expenses included $1.3 million of merger-related costs as well as non-merger-related severance costs of $261,000. Adjusting for those charges, adjusted non-interest expense was $34 million or a 6% increase from the linked quarter. The increase was due to normal annual salary adjustments, incentive accruals and additional Bank of Denver employee costs. As a reminder, we expect to divest our Florida branches in June 2024, which will result in a reduction to our quarterly expense run rate of about $700,000 beginning in July 2024.”
Read the full earnings call transcript here.
9. NB Bancorp Inc (NASDAQ:NBBK)
Number of Hedge Fund Investors: 4
Massachusetts-based commercial banking company NB Bancorp Inc (NASDAQ:NBBK) saw insider buying activity on April 26 when its CEO Joseph P. Campanelli piled into 15,000 shares of NB Bancorp Inc (NASDAQ:NBBK) at $14.59 per share. Since the through May 3 the stock is up 0.7%.
8. HBT Financial Inc (NASDAQ:HBT)
Number of Hedge Fund Investors: 6
Illinois-based HBT Financial Inc (NASDAQ:HBT) is one of the undervalued bank stocks insiders are piling into. On May 1, HBT Financial Inc’s (NASDAQ:HBT) CFO Peter Robert Chapman piled into 1,100 shares of HBT Financial Inc (NASDAQ:HBT) at $18.93 per share. Since then through market close of May 3 the stock has gained about 1.27%.
Unlike JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC), which are highly popular among hedge funds, HBT is a small company with low hedge fund sentiment.
7. Mid Penn Bancorp Inc (NASDAQ:MPB)
Number of Hedge Fund Investors: 6
Ranking seventh in our list of the top undervalued financial stocks with insider buying is Pennsylvania-based Mid Penn Bancorp Inc (NASDAQ:MPB). Matthew G. De Soto, a director at Mid Penn Bancorp Inc’s (NASDAQ:MPB) board, on April 29 piled into 11,067 shares of Mid Penn Bancorp Inc (NASDAQ:MPB) at $20.74 per share. Since then through May 3 the stock is up 2%.
In addition to MPB, investors are also paying attention to JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).
6. Northwest Bancshares Inc (NASDAQ:NWBI)
Number of Hedge Fund Investors: 11
Northwest Bancshares Inc (NASDAQ:NWBI) CEO Louis J. Torchio on May 2 piled into 2,295 shares of Northwest Bancshares Inc (NASDAQ:NWBI) at $10.87 per share. Since then through May 3 market close the stock gained about 1.3%.
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Disclosure. None. Insiders are Buying These 10 Undervalued Bank Stocks was initially published on Insider Monkey.
