Every once in a while, the market loses its mind.
That’s where we are now. The market is being driven by coronavirus fears and the hope that we do not have a socialist with a chance of winning the White House in December.
In a scene reminiscent of the baptism in The Godfather, the Democratic National Committee handled all family business this week by removing lagging candidates and collecting endorsements for Mr. Biden.
The market likes the fact that the contest will come down to two elderly Caucasian men who aren’t socialists.
Bernie’s early rise was a source of concern for every capitalist in the country, including yours truly.
We’re a long way from done with the primary cycle, but Mr. Biden’s resurgence gives us some hope that we, as a nation, have not truly and completely lost our minds.
However, that does not mean we can sound the all-clear…
Finding the Opportunity in Uncertainty
Bernie may have been temporarily thwarted, but the pesky coronavirus is still with us and still has the potential for severe economic impact.
We don’t know how this will play out in the weeks and months ahead.
No one does.
Taking an enthusiastic stance on either side of the market could have tragic consequences, so a healthy dose of caution is in order.
While I would avoid most stocks right now with the market still trading north of 20 times earnings, I would look for big down days to accumulate shares of some banks where insiders have been stepping up to the plate in the past week.
Bank stocks have been walloped on fears of a slowing economy and incredibly low interest rates, but some of them have traded down to levels that make no sense, and officers and directors at some bank have taken advantage of discounted pricing.
As we’ve discussed before, insider buying has historically proven to be a powerfully profitable trend.
In the past week, the insiders at three of my favorite banks have been buying shares in the open market and make solid targets in an otherwise volatile market.
Insider Buy #1: PacWest Bancorp
PacWest Bancorp (NasdaqGS:PACW) is a dividend darling right now with a yield of over 7%. The stock has been hit hard as selling has driven prices down by 11% over the past week.
This bank has a fantastic business as it works with high tech firms along with those companies’ executives and employees.
There is no excuse for shares of PacWest to trade at less than eight times earnings when it’s been growing earnings at 15% a year.
Senior Vice President and head of the community banking division at PacWest Christopher Blake shares my enthusiasm for the stock of his bank as he wrote a check for $150,000 this week to buy more shares of the bank.
It is also worth noting that the CEO of the bank spent more almost $250,000 buying stock at prices more than 20% higher than the current quote just three months ago.
Insider Buy #2: Central Pacific Financial
The CEO of Hawaii-based Central Pacific Financial Corp. (NYSE:CPF) also decided that the price of his bank had dropped by too much.
Paul Yonamine spent a little over $200,000 this week to add to his stake in the bank he oversees.
Central Pacific is one of the best lenders in the island state with nonperforming assets that are just 3% of total assets.
Central Pacific has the lowest priced core deposits in the state and grew deposits by over 6% last year.
Earnings have been growing at a double-digit pace for the last five years, so the double-digit price decline in the past month would seem to be overdone.
Insider Buy #3: Sonabank
Southern National Bancorp of Virginia Inc. (NasdaqGM:SONA) has not dropped as much as some banks falling just a little over 7% in the past month.
Still, several insiders, including the CEO and Chairman, have stepped up to buy shares of the fast-growing bank headquartered in Northern Virginia.
With the stock trading at just ten times earnings despite 20% earnings growth over the past five years, ten officers and directors have cracked open the checkbook to buy shares in the bank.
Stay Disciplined When Volatility Runs Amok
No one knows what will happen in the short term in the stock market.
The Fed’s 50 basis point emergency rate cut would seem to indicate that the economy could take a hit in the weeks and months ahead.
Any high certainty prediction right now should be viewed with a great deal of skepticism and a dash of hostility at the pure arrogance of such a statement.
What I do know is that buying banks trading at low valuations when insiders make large purchases has been wildly profitable over the years and should be again this time for patient, aggressive investors.
To the Max,
— Tim Melvin
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Source: Max Wealth