Insiders Buying at Fixer-Upper Bank

12/29/2010 2:06 pm EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

A small Michigan lender that's suffered a spectacular fall from grace now looks like an attractive buyout candidate, writes Mark Skousen, editor of Turnaround Trader.

As the year comes quickly to a close, we're focusing on bank stocks, an industry that should do well in 2011. There's lots of talk of mergers and acquisitions.

Our bigger winner this month is Citigroup (NYSE: C), advancing 13% so far in December. The Obama administration considers Citigroup in good enough shape to sell the government's remaining shares worth $10 billion, and the stock has responded favorably to this news.

We are also looking for small bank stocks that might be good takeover candidates. This year alone, bank mergers resulted in an average 82% gain for the acquired bank's stock.

One plausible candidate is Flagstar Bancorp (NYSE: FBC), a Troy, Michigan-based bank with 65 branches in Michigan, Indiana, and Georgia. The stock was trading for more than $140 a share before the financial crisis, fell to $5 a share last May and is now less than $1.50. [Shares were up 7% on the day to $1.64 in recent trading-Editor.] Earnings are down and the stock has suffered from heavy tax-loss selling. In fact, it's selling for a fraction of its $5.30 book value.

But there is some good news. Quarterly revenues tripled to $459 million, and the bank is expected to be marginally profitable next year. It has nearly $3 billion in cash to deal with its $3.65 billion in debt. It might be a good takeover candidate by one of the regional banks.

The tax selling is probably over by now, and FBR Capital recently upgraded its rating of the stock to "outperform."

Moreover, company officers and directors have bought 2.2 million shares worth of the bank's stock since Nov. 1 at prices between $1 and $1.35.

In every way, this small bank stock is a super bargain. Set a protective stop of $1.20 a share.

[The banking sector has been among the market's star performers this month, as reflected in the KBW Bank Index's 14% advance. Jim Jubak has just named three banks among his 10 stock picks for 2011. Jubak also recently write about another favorite financial poised to cash in on higher interest rates. Meanwhile, Richard Band has recommended a thriving regional lender that avoided most of the mistakes made by its big-city rivals-Editor.] 

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