As Cyprus reminds the world that the European banking crisis is by no means fixed, investors in the big bank stocks that have been leading this rally are getting taken to the woodshed. For those looking to protect gains but who want some exposure to the improving U.S. economy, KBW's director of research and chief equity strategist, Fred Cannon, suggests taking a look at the smaller U.S. regional banks (KRE).
Cannon's logic is as follows:
- Banks under $50 billion in assets are, as he puts it, out of the sights of the Federal Reserve. They don't have to worry about the Volcker rule and their executives aren't likely to be grilled in Senate testimony anytime soon.
- With strong balance sheets and little place to go with the cash, there's potential for deals that add to earnings immediately. As Cannon puts it, acquisitions are "heating up in the smaller banks," which creates a natural bid for the stocks.
- Exposure to strong regional economies. Moving around the country on the hunt for small banks allows investors to pick and choose their exposure to local economies. Shale oil, Texas drilling and institutions with exposure to America's drive for energy independence are booming even as the rest of the nation waits for the recovery to kick in.
Prosperity Bancshares (PB) in Texas is right in Cannon's wheelhouse.
With Cyprus likely to impact the financial markets all over the world today, it might be possible to scoop up banks that are getting hit by collateral damage.