Everyone has hobbies, right? Some folks like golf. Some people hunt. Some garden.

I like to crunch numbers and test investing theories.

I once spent an entire three-day holiday weekend at a friend’s place in Chicago, running correlation studies of every conceivable economic indicator to see which ones were predictive of stock market movement. The only time we left his condo was to head down to the old Melvin B’s on Rush Street for burgers and beers to fuel the next round of number crunching.

This kind of thing is legitimately fun for me, but more importantly, it makes me a better investor. The quantitative approach takes all the emotional guesswork out of making money.

(Case in point: One of my recommendations from a little over a month ago is doing over double the S&P 500’s returns right now across the same time frame, and I expect it to keep going.)

One of the best ways I’ve found to make consistent money in the stock markets is to buy bank stocks with high yields and low price/earnings (P/E) ratios. It produces results that would make Warren Buffet and George Soros weep with envy – just the top 20 of the stocks on my list doubled the S&P 500 over the last decade, during one of the best decades in its history.

The best part is, this strategy even works in a bad market. For example, during the lost decade of 2000-2010, using my high yield bank stock approach would have turned every dollar invested into $13 when the indexes didn’t even break even.

Today, I want to share two stocks that popped up on the model recently, both fantastic franchises with solid balance sheets and clean loan portfolios.

Each one is providing yields well over 4%, and I think they both have plenty of room to run…

This Regional Bank’s Lending Portfolio Is an Income Machine

First Interstate Bancsystem Inc. (NASDAQ: FIBK) is the holding company for First Interstate Bank. The bank has 150 branches and does business in its home state of Montana as well as Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming. It has been growing both organically and through mergers and acquisitions, currently holding over $19 billion in total assets.

The bank has a well-diversified lending portfolio, with strong commercial and individual loans. One thing that makes it stick out is its skill at evaluating loans, as it has a non-performing assets ratio of just 0.15%, just about half the industry average.

First Interstate has a lot of its portfolio invested in securities, including government and municipal bonds as well as mortgage-backed securities. These produce cash flow that can be reinvested as interest rates rise. That should help boost earnings in 2022.

And as interest rates move higher, the bank has about $2.3 billion in cash to invest in order to compensate.

The stock is yielding 4.7% right now, and the P/E ratio is just 11. The payout has grown at over 13% a year for the past five years, so shareholders should expect those yields to climb substantially over time.

Provident’s Business Loan Focus Means Solid Growth

Provident Financial Services Inc. (NYSE: PFS) operates as the bank holding company for Provident Bank in Jersey City, New Jersey. The bank has 99 full-service branch offices in northern and central New Jersey and in Pennsylvania and New York counties. Though it’s been around since 1839, it only became public in 2003 when it made a mutual thrift conversion offering. Provident has grown substantially since then and now has over $13 billion in assets.

While it has a single-family mortgage portfolio, Provident is more a business bank than First Interstate. More than half of the loan book is commercial real estate, and the commercial and industrial portfolio makes up over 9% of the total.

It is doing a fantastic job of growing the loan book as the economy reopens in the northeast. Loan growth increased 18% quarter over quarter, with the commercial loan portfolio growing 7%.

Provident’s fee-based businesses are also going strong. Its insurance business saw 23% year-over-year growth, while the trust company gains saw over 18% growth.

The stock is yielding 4.35% right now, and management has been increasing the payout by almost 6% annually. The bank has also been buying back stock in the open market.

Provident is more likely to buy a competitor than to be sold, but you can never rule out a takeover in today’s banking world. As the New York area continues to return to normal, I would have to think that many banks would look at the commercial lending business of Provident and consider making a bid.

But with or without a takeover offer, we’re still talking about a stock trading right around book value with a P/E ratio of 10. The potential upside here is substantial.

— Tim Melvin

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Source: Money Morning