How Banks Can Deliver Monster Returns

Banking Industry, Financial Sector, Investing Strategies

I am always hunting for ideas that can boost portfolio returns for individual investors.

I read, I ponder, I imagine, I study, and I test these ideas. Many of them end up in the junk pile as good ideas gone bad—these are usually the ones that sounded the most exciting when I first had or found the idea.

But then there are the ideas that work.

Like the “perfect dividend stock” service I just launched…

The whole idea behind The 20% Letter—the new service we just launched, where I reveal the perfect dividend stock that’s raised its dividend by 37.5% on average, that will make more money as interest rates go up, that trades at a massive discount, and that pays an 8% yield—is to share those ideas and help readers accelerate the pace at which they can grow their wealth.

I have a core idea for the portfolio that has delivered returns over the past several decades that would make the cockiest hedge fund manager blush with envy. Around that core, I will be adding ideas from strategies I have uncovered that can deliver extraordinarily high returns over time.

We are going for compounded returns on steroids here.

The strategies I’ll feature in The 20% Letter will often consist of very concentrated portfolios with just a few stocks at a time meeting the criteria I develop. If I were talking to a big institution, that approach would not be of much use. But my readers are individuals, so they can use everything I find, no matter how concentrated the strategy is.

I recently tested a variation on a theme I have used often and found that it uncovers a small number of stocks with market-beating potential that can help turbocharge our already red-hot core portfolio.

It should come as no surprise to anyone who has been reading my articles that I love bank stocks. Unfortunately, most investors do not understand how much money they can make by owning the right bank stocks bought at the right price.

But I learned the formula years ago, and it has made a big difference in my life. And another group of people has pretty much figured out the formula as well: the bankers themselves.

I wondered what would happen if we created a portfolio around the rigid criteria I use to select bank stocks in which insiders have made large purchases of stock.

I limited my universe to banks with less than $5 billion of market cap, and in my test, I limited purchases to those banks where an officer or director had made an open market purchase of at least $500,000 worth of stock.

I also added some strict valuation criteria to ensure we got a bargain-priced entry point.

As you might expect, this simple idea delivers monster returns for patient-aggressive investors. Adding the small handful of banks that fit the criteria to a portfolio can help you reach your financial goals a lot quicker.

HomeStreet Inc. (HMST) is a perfect example of the type of opportunities this strategy can uncover to boost long-term portfolio profits. The Seattle-area bank turns 101 this year. It has 62 branches in the Western United States and serves markets in its home state of Washington, as well as Oregon, Southern California, Idaho, and Utah.

HomeStreeet totally remade itself about a decade ago, bringing in new management and shifting its lending activities to commercial lending with a focus on high-end multifamily loans. It is incredibly good at multifamily lending, evidenced by the fact that it has no delinquent loans and no non-performing assets in that part of the loan portfolio.

The bank is well positioned right now, no matter what happens in the U.S. economy. The upper end of the multifamily market should not experience much of a drop in demand in its markets, and rising rates will be good news for net interest margins at the bank. The average commercial real estate loan in HomeStreet’s portfolio has a loan-to-value rate of just 59% right now, so it is improbable it will develop any serious difficulties even if we have a recession in 2023.

U.S News and World Report has selected HomeStreet as the best small bank in Washington. Bank Director Magazine recently named the bank as number eight on both its best small banks and best board of directors lists.

HomeStreet management is incredibly shareholder friendly. HMST shares currently yield a little over 4%, and the bank has repurchased about 7% of the outstanding shares this year.

The stock is currently trading right around book value and at its current price the price-to-earnings ratio is less than eight.

Insiders are excited about the stock’s potential over the next several years. Mark Patterson, a member of HomeStreet’s board of directors, has been very aggressive about buying stock over the last few months. He has made two purchases of more than $500,000 in the past six months, as well as five additional six-figure purchases, to build his position in shares of HomeStreet.

Not only is he on the board, but Patterson was also a very successful investor as a managing partner of NWQ Investments until he retired in 2014. He knows banking, and he knows the markets. He is also already a very wealthy person, so the fact he is loading up on shares of the bank that he helps manage makes an enormous statement.

As patient, aggressive investors looking to grow our money at high rates of return, we should be listening to the statement Patterson is making with a great deal of interest.

This dividend stock beat the market by 2,325% in the past 22 years!

It’s not REITs or blue chips like Disney. A small, little-talked about area of the dividend stock market is pumping out market-beating returns like no tomorrow. Over 22 years, they’ve handily beat the market… and I have the #1 stock of these to give you now.