Justin’s note: If you want to double your money, look at bank stocks.
Regular readers aren’t used to hearing that, and for good reason. You see, bank stocks aren’t Casey Research’s bread and butter.
But we’re contrarians. We make bets on assets that other investors want nothing to do with—and that’s exactly what we’re seeing with bank stocks today.
I recently got on the phone with Strategic Investor editor E.B. Tucker, who’s been researching this opportunity for the past 10 months.
As you’ll see, he says bank stocks are one of today’s top contrarian plays… and they’re presenting one of the best setups he’s seen in his career…
Justin Spittler: E.B., let’s face it… “invest in banks” isn’t something long-term Casey readers are used to hearing. What makes them so attractive today?
E.B. Tucker: So one thing that’s really important to understand is that when everyone agrees on something, they’re usually wrong. When people say they don’t like banks, most of the time what they are speaking of is the 2008 real estate crisis, and the ensuing credit collapse that was driven by the big banks.
What we want to help people understand is that in the wake of the crisis, the “money center banks”—these are the name-brand banks you’ve heard of like Citibank and JPMorgan Chase—had a lot of sway over the political establishment in Washington.
And they knew they were in trouble. They ran down to Washington and lobbied the government to create the Dodd-Frank Act. What this bill did was create a series of structures that allowed the big banks to heal themselves with some help from Washington at the expense of the little banks.
So when we say “big banks,” we’re really talking about the 15 biggest banks in the country. What happened was that if a bank was a certain size, this regulatory framework became very helpful and protected you from competition. But there are more than 15 banks in the country. There are thousands that did not benefit from this. In fact, the restrictions were very, very punitive on these banks.
If you were a really small bank—like a little community bank with three branches—no problem. For the really small banks, it was business as usual. And if you were a really big bank, then you had a system in which the Federal government was protecting you and giving you some time to heal from the crisis.
But if you were in the middle, you were screwed. Because as soon as you got to $50 billion in assets, you ran into the same regulations that were protecting the bigger banks… which made it impossible to continue to grow.
Justin: So what’s changing now?
E.B.: Now, under President Trump, Congress is rolling back the banking regulations under Dodd-Frank.
The president recently signed a bill into law that reduces regulations on all but the largest U.S. banks.
Not only will it ease the oversight of all banks below $250 billion in assets… It also exempts small community banks from the strict rules established by Dodd-Frank.
The new law will give banks more freedom to operate.
And now, we’re starting to see acquisitions pick up. Because the problem was that during the Obama era, the law capped bank growth at a certain level. So a bank could only grow to a certain size and then it could not grow anymore or else it entered this next phase of regulation which was effectively what the largest banks were subjected to.
Traditional banking was in the penalty box for eight years under Obama. And now Trump’s turning banking back into a free-market enterprise, which is what it always was up until the crisis.
Justin: Very interesting… So Trump is setting the smaller banks free. What does that mean for the average investor?
E.B.: It’s a huge opportunity.
As strategic investors, we’re looking out four to six quarters ahead. We want to invest in bank stocks now, right when this new legislative relief kicks in… not next summer, when you’ll open up the finance section of USA Today and see it says “boom times in the banking business.”
Rising demand, fewer regulations, and lower expenses is a set of conditions where even the worst companies find a way to make money.
This is what we see coming for the banking business over the next few years. We want to buy the bank stocks most likely to benefit before the overall market catches on.
Here’s why certain banks look attractive right now:
Rising Interest Rates—As rates rise, banks charge more to borrow.
Steady Deposit Rates—The interest banks pay depositors is an expense. It tends to rise slower than the rate charged to borrowers. The difference between the two is the banks’ net interest margin. This is the primary measure of profitability for banks.
Less Regulation—This means lower compliance expenses and fewer restrictions on growth. Previously, banks with assets above $50 billion entered a near-impossible regulatory situation. That’s being moved up to $250 billion.
Steady Dividend Payout Ratios—Banks usually pay out a good portion of earnings to shareholders. Around 30% is common. Before the Obama-era Dodd-Frank Act, that number was regularly 40%.
Less government intervention paired with rising interest rates means huge savings and high growth potential. These factors should, in turn, generate higher profits… 30% of that profit flows to shareholders. If dividend payout ratios return to pre-Obama levels, we could see 40%. That would mean a 33% boost to shareholders who own bank stocks before this kicks in.
This is one of the best setups I’ve seen for banks in my entire career.
In fact, it’s as good of a setup as you’re ever going to see in an asset class.
The government caged banks for 10 years. The Trump administration is openly saying it plans to set them free. This is a trend we don’t want to miss.
Justin: Thanks, E.B. Before I let you go, do you have any advice for people who want to get started investing in bank stocks?
E.B.: In Strategic Investor, we’re not interested in owning mega-banks like JPMorgan or Wells Fargo.
In this new climate, we want to own the smaller, regional banks that will acquire smaller, local banks before being acquired themselves. Today, there are around 5,500 banks in the U.S. We expect consolidation to shrink that number substantially over the coming decade. Owning shares of likely-to-be acquired banks is the best way to profit.
This means banks with around $20 billion in assets. This number is a sweet spot in our view. The smallest banks won’t give us the scale needed to benefit from reduced regulation. And banks with more than $30 billion in assets might mean that some of the upside is already in the share price.
We’re also targeting banks that are run by guys that have “skin in the game” and a vested interest in the bank’s future.
Right now in our portfolio, we have two companies that fit this criteria and are set to thrive in the years ahead.
Justin: Great stuff, E.B. Thanks for taking the time to speak with me.
Justin’s note: E.B. just released a new video with more on why you need to own bank stocks today.
You see, in 2008—in one of the biggest cons in American history—taxpayer funds were abused by the bank bailout. Washington elites gave the megabanks $245 billion.
The money you paid to Uncle Sam over the past 10 years went to ungrateful executives and their million-dollar yachts. And rather than return the favor… these bankers cut your income from savings accounts and CDs to nearly zero.
But now, American citizens can be “compensated” for this outrageous filching of our money. It’s through what E.B. calls “Bailout Compensation Checks.” Some people are paid $8,979… $9,587… and $15,111 on a regular basis. Click here to see how you can access yours today.
Are you going to invest in bank stocks after reading today’s interview? If you already are, let us know how it’s going right here.
How to Meet E.B. Next Month in Bermuda
E.B. will be speaking at our first-ever Legacy Investment Summit next month. He’ll explain how to “turn dimes into dollars” in the stock market. He’ll also be on two panels discussing wealth-building strategies outside the stock market and what to expect from the gold market in the months ahead.
The Legacy Investment Summit will be held at the beautiful Fairmont Southampton Hotel in Bermuda. This is a world-class destination with all the essentials for an amazing vacation… beautiful beaches, a picture-perfect golf course, scuba diving, fishing, jet skiing, oceanfront tennis, and so much more.
There are still spots available, so if you’re interested don’t delay. Click here to learn more.