After facing years of a challenging operating environment and intense regulatory scrutiny, banking stocks have gradually regained their past glory and are among the investor favorites now. The performance of the banks has been improving over nearly a year.
Domestic economy, on which the banks are majorly dependent, has been showing signs of improvement as GDP numbers continue to rise, housing market stabilizes, consumer spending increases and unemployment rate remains at historically low levels. Banks’ financial performance has been improving on the back of these.
Additionally, three interest rate hikes in the past year benefited banks. With the economy still gaining strength, one more rate hike will likely be announced later this year. So, banks are projected to continue gaining from the rising rates.
Also, since his election in November 2016, President Donald Trump’s promises of lesser regulations and tax reforms boosted investors’ confidence. With the banks being one of the biggest beneficiaries from these structural reforms, the sector’s stocks have been witnessing a significant rally.
While speculations of delayed implementation of Trump’s financial policies somewhat dampened investors’ confidence, the major banking sector indices have significantly outperformed the major indexes.
Over the past year, S&P Regional Banks Select Industry Index and SPDR S&P Regional Banking ETF (KRE - Free Report) have jumped 20.3% and 19.3%, respectively, while the S&P 500 rallied 12.4%.
Plenty of Upside Left
Driven by the rally, banking stocks seem a bit expensive. But these look undervalued compared with the broader market.
Looking at the sector’s price-to-book ratio, which is the best multiple for valuing banks as large variations in the earnings results from one quarter to the next, investors might still want to pay more. The sector currently has a trailing 12-month P/B ratio of 1.79, which compares favorably with 3.63 for the S&P 500.
Therefore, riding on expectations of further rate hikes and continued improvement in the operating environment, banking stocks have significant growth prospects in the quarters ahead. To cash-in the banks’ growing trend in the future, this is the right time to add a few stocks that have further growth potential.
Selecting Banks With Enhanced Growth Prospects
We have taken the help of the Zacks Stock Screener to select the favorable stocks. To shortlist the stocks from the vast universe of banks, we have picked stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
To further narrow down the list, we selected those which have Growth Score and VGM Score of A or B. Our research shows stocks with a Growth Score and VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are the four stocks that fulfilled these criteria:
Park Sterling Corporation (PSTB - Free Report) carries a Zacks Rank #2. The stock has Growth Score and VGM Score of B. In the past year, the company recorded a 31.7% jump in its share price. Also, it is expected to record 15.4% earnings growth for 2017 and 13.3% for 2018.
With a Zacks Rank #2, and Growth Score and VGM Score of B, CNB Financial Corporation (CCNE - Free Report) witnessed 19.2% rally in its share price. Also, the company is expected to record 12.7% earnings growth for 2017 and 15.6% for 2018.
FS Bancorp, Inc. (FSBW - Free Report) has a Zacks Rank #2, Growth Score of B and VGM Score of A. In the past year, the company’s shares have surged 87%. Also, it is expected to record 18.8% earnings growth for the current year.
Old Second Bancorp, Inc. (OSBC - Free Report) carries a Zacks Rank #2 and has Growth Score and VGM Score of B. In the past year, the company recorded a 33.5% increase in its share price. Also, it is expected to record 41.5% earnings growth for 2017 and 9.3% for 2018.
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