Small is not Always Bad

12/29/2006 12:00 am EST


Doug Hughes


Banking expert Douglas Hughes takes a look at the performance of the banking industry and finds it's time for a shift from the large to the small. Here, he recommends a handful of companies for investors to consider for 2007.

"Many banks are trading at two year lows, and are great buys as long as you have a 5+ year time frame. You will make money, not 40% + anymore, but 11%-17% annualized over the next 10-20 years--not bad, with low risk.

"Buying the banks we like at just over book to 1.5 times book is a very good opportunity, and with the very low long-term interest rates still in place, the higher prices are warranted. Now is the time to add serious money to select thinly-traded names like Harleysville Savings (HARL NASDAQ GM), Sterling Bank (STNJ NASDAQ CM), National Mercantile Bancorp (MBLA NASDAQ CM), Old Point Financial (OPOF NASDAQ CM) and my new recommendation below, Slade's Ferry Bancorp (SFBC NASDAQ CM).

"Most of the larger regional names that trade widely have all moved back up 10%-20%. Now it is back to the small names at year-end. Please keep at least one hedge/short if you are margined in 2007. If you can wash the "short-term" gains in Union BanCal (UB NYSE), sell this one over $60.60 and move the money into the smaller names above.

"Slade's Ferry is the holding company for Slade's Ferry Trust Company, with nine retail locations in southern Massachusetts. Almost 50 years old, it has total assets around $600 million with solid net interest margins at 3.32%. The bank has recently declined to new yearly lows; this is over done.

"Slade's is located in some great markets and trading just a few dollars above its $12.30 book value, a great buy today. The stock is somewhat thinly traded, with just over 4 million shares outstanding and insiders owning a bunch, so please buy it carefully. Insiders also have been buying at higher prices, a good sign for the future. They also have some options at much lower prices, but not a lot.

"Slade's pays about a 2% cash dividend. Loan growth has been ok at 4%, but with this tough yield curve, I think it might sell sooner than later, and it must be worth about 2 times book or $25.00--a 40% premium to today's prices. Slade's should earn a $1.10 + in 2007. Downside risk, the largest factor for the next two years, should be 5-8% at most.

"Asset quality is also very solid, with reserves at just over 1.00% and non-performing loans very low at 0.10%. Buy now."

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