After The Big Banks' Rally, These Small Banks Could Be Next To Surge

Tim Melvin is a value investor, money manager and writer with nearly 30 years of experience in the financial services and investment industry.

Melvin focuses on identifying under-the-radar value stocks and was a guest on Monday's edition of Benzinga's PreMarket Prep to offer some of his top picks in the banking sector.

Small Bank Picks

Many large-cap financial stocks have surged since the U.S. presidential election, which begs the question: Is the run-up in financial stocks over?

Melvin believes investors shouldn't buy banking stocks trading at more than 92 percent of their respective tangible book value, which makes it more difficult for investors to allocate new money to the financial sector.

Top Picks

Melvin did offer a few of his top picks within the financial sector, but he did caution listeners to be aware these are mostly nano-cap banks with a daily volume in the thousands of shares.

Melvin's picks are mostly unheard regional banks that see little to no coverage from the Wall Street community. Meanwhile, the large-cap big banks may have run up too far, especially when assuming that President-elect Donald Trump's policies won't benefit these banks.

Specifically, there can never be enough support among politicians and law makers to ease regulations on the largest financial institutions. However, smaller banks will see capital freed up from the eased regulatory environment that will flow to the bottom line, while other banks will see capital freed up that can be allocated toward accretive M&A activity.

Melvin said many small banks either do a good job in building their businesses along with paying investors a solid dividend or buying back their own stock. However, small banks have found it difficult to operate given the regulatory environment that has resulted in some industry consolidation. Either one of those is a great outcome for investors who can buy a solid bank and hold on to shares for some time.

First on Melvin's list is Equitable Financial Corp. EQFN, a regional bank with a market cap of around $32 million that operates in Grand Island, Nebraska.

Equitable Financial is trading at 86 percent its tangible book value, boasts a great loan portfolio and a fantastic balance sheet. Moreover, there is a lot of "smart money" invested in the stock along with some activist shareholders.

Hamilton Bancorp

Hamilton Bancorp Inc HBK, a Baltimore, Maryland-based regional bank, is trading at approximately 75 percent to its tangible book value.

Melvin noted the Maryland banking market has seen some consolidation as of late. This is expected to continue, and Hamilton Bancorp should be considered as a target to be acquired.

Listen to the full discussion in the clip below.

PreMarket Prep is a daily trading ideas show that focuses on technical analysis and actionable short term trades. You can listen to the show live every morning from 8–9 ET here, or catch the podcast here.

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