The common advice to 'buy more cheaper' when a stock falls is a flawed strategy. It often leads to allocating more capital to your worst ideas and compounding mistakes. Instead of automatically adding to losers, the bar for re-investment should be exceptionally high.
Investing in banks solely for M&A potential is a poor strategy. Acquirers are disciplined and avoid overpaying, meaning investors are often left holding mediocre franchises waiting for a small pop that may never come. Focus on organic growers or smart acquirers instead.
After a decade of underperformance, European banks are becoming attractive. Management teams are shifting away from empire-building and adopting a new focus on shareholder value, demonstrated by increasing ROEs, divesting non-core assets, and executing large share buybacks.
The most reliable indicator for identifying top-performing bank stocks over the long term is the rate of tangible book value (TBV) growth. A screen for banks that have compounded TBV the fastest will yield a list nearly identical to the best-performing bank stocks.
Financial advisors such as Ameriprise and Raymond James have compounded earnings at high rates (17% annually) for decades, yet trade at low P/E multiples (~11x). Their sticky, direct-to-customer relationships create a strong moat that the market underappreciates compared to asset managers.
Months before its collapse, SVB's insolvency was calculable using its own Q3 2022 earnings release. A simple mark-to-market adjustment of its securities portfolio revealed a negative tangible equity of $4 billion, a clear red flag missed by the market.
While AI and fintech lower switching costs for retail customers, small and mid-cap banks retain their core clients—small to medium-sized businesses. These businesses depend on the sticky, lifeblood credit relationships with their local banks, making them less likely to switch for better deposit rates.
Private credit grew by taking on riskier loans that banks shed after Dodd-Frank, making the core banking system safer. However, banks now provide wholesale leverage to these private credit funds with minimal due diligence, creating a new, less transparent concentration of risk.
A market anomaly exists where large-cap banks trade at higher multiples (12x earnings) than smaller, faster-growing banks (8x earnings). This is driven by massive passive investment flows into large-cap indices and the perception that large banks are 'too big to fail.'