I have seen a few articles lately hinting at the fact that the market is headed for downturn as retail investors, often referred to as Mom & Pop in these bearish outlooks, rush to dump their cash back into equities. I am assuming that the grounds for this assumption are that the average retail investor is uneducated, destined to pour their hard earned and meticulously saved dollars into some overvalued blue chip.
t is time to empower yourself as an investor and break the chains that are mega and large cap companies. Market cap has very little indication as to the future performance of a company (though it can hint at when things are overvalued). You do not have to look far to identify profitable and stable businesses that just happens to be smaller in size (for now). A great place to start to research some smaller cap companies is regional banks.
Regional banks only operate in a small part of the country. These banks tend to be more conservative in not only their investments, but also in their loan origination. The companies tend to have lower volatility in relation to the overall market, pay nice dividends, and operate with high profit margins. We will look at three regional banks: KeyCorp (NYSE:KEY), Umpqua Holdings Corp (NASDAQ:UMPQ), and Great Southern Bancorp, Inc. (NASDAQ:GSBC), and identify why small cap companies deserve your attention as much as the blue chips.
KeyCorp
KeyCorp operates as the holding company for KeyBank National Association, which provides various banking services in the United States. As of Dec. 31, 2012 the company operated 1,088 retail banking branches in 14 states; a telephone banking call center; and 1,611 automated teller machine in 15 states. KeyCorp (NYSE:KEY) trades at just 11.18 times forward earnings and at book value. KeyCorp (NYSE:KEY) is one of the best regional banks in terms of operating efficiently. The bank is able to turn over 20% of its revenue into profits, one of the highest profit margins in the regional banking industry. The company also has a dividend yield of 1.6% with a payout ratio of just 22%. This low of a payout ratio will allow KeyCorp (NYSE:KEY) to increase dividend payouts even if revenue does not grow as expected. KeyCorp (NYSE:KEY) also manages its debt very well, with a debt-to-equity of just 0.76 and a current ratio well above 2.0.
Umpqua Holdings
Umpqua Holdings Corp (NASDAQ:UMPQ) operates as the holding company of Umpqua Bank and Umpqua Investments, Inc., which provide commercial and retail banking and brokerage services to corporate, institutional, and individual customers in the United States. Umpqua Holdings Corp (NASDAQ:UMPQ) has a debt-to-equity of only 0.3 and currently trades at just 15.34 times forward earnings. The company also trades at just 0.87 times book value and 8.32 times free cash flow. Umpqua Holdings Corp (NASDAQ:UMPQ) is expected to grow earnings 11.5% annually over the next five years. Umpqua Holdings Corp (NASDAQ:UMPQ) also sports a nice dividend, which currently yields 3.17% and their payout ratio of 42% is respectable. The company’s PEG ratio also sits at an optimal 1.33–typically a PEG between 0.8 and 1.8 means a company is trading at a discount to its future earning potential.
Great Southern Banc Corp.
The final regional bank we will analyze is Great Southern Bancorp, Inc. (NASDAQ:GSBC). In line with our other regional banks, Great Southern acts as the holding company for Great Southern Bancorp, Inc. (NASDAQ:GSBC), which operates in five states across the Midwest from Minnesota to Arkansas. The company currently trades at just 6.62 times trailing twelve months’ earnings with year-over-year earnings growth of 61%. Great Southern Bancorp, Inc. (NASDAQ:GSBC) currently yields 3% with a below average payout ratio of 30%. Great Southern Bancorp, Inc. (NASDAQ:GSBC) has a very high percentage of share outstanding owned by insiders (35%). This percentage shows that management has an extra incentive in running the business well, as the performance of the company’s stock is directly related to their own financial well being.
Wrap Up
The theme seems to be consistent when it comes the regional banks analyzed above. These are well run and undervalued companies that still manage to sport above average yields. The bottom line is that the banking industry is slowly rebuilding its reputation, and these regional banks have suffered as a sort of collateral damage from the financial crisis. The bright side is that these companies are still undervalued and you can collect some dividends while you wait for capital appreciation. My guess is that you won’t have to wait long.
The article 3 Regional Banks Priced to Buy originally appeared on Fool.com and is written by Daniel Paterson.
Daniel Paterson has a position in Great Southern Banc Corp. The Motley Fool owns shares of Great Southern Bancorp and KeyCorp. Daniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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