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Commerce Bancshares: How to Play It

Stocks in this article: CBSH HCBK KRE

KANSAS CITY, Missouri ( TheStreet) -- Investors considering a new position in Commerce Bancshares (CBSH) might gravitate toward names trading at lower multiples with higher dividends, such as Hudson City Bancorp (HCBK), but Commerce offers a more diversified revenue stream and plenty of upside potential for long-term investors.

Analysts have a middling view of Commerce Bancshares. Of brokerages covering the stock, all six, including financial sector focused KBW, Macquarie and Sterne, Agee & Leach rate it hold. A median target of $42.67 suggests that the stock is undervalued by 19%. The shares currently offer a dividend yield of 2.6%, with a reasonable payout ratio of 38%.

>>Commerce Bancshares Numbers Do the Talking

Investors interested in diversifying idiosyncratic risk can play the broader sector through the SPDR KBW Regional Banking ETF (KRE).

In a market where about two-thirds of publicly traded holding companies (excluding those traded on the Pink Sheets) are trading below book value, Commerce doesn't appear to be a bargain, trading at 1.6 times tangible book value as of Friday's close, according to SNL Financial. Then again, at the end of 2008, the shares traded for 2.3 times book, suggesting quite a bit of growth potential over the long term.

Commerce Bancshares pays out a quarterly dividend of 23.5 cents a share, for a yield of 2.57% as of Friday's close. In comparison, the shares of Hudson City Bancorp -- another conservatively run regional holding company with strong asset quality and good earnings performance -- closed at $11.62 Friday, or just 1.1 times tangible book, and featured a dividend yield of 5.16%.

So why consider Commerce Bancshares when you get paid less to wait? Well for starters, the company provides a much more diverse revenue stream and a better net interest margin than Hudson City. Another reason is that although shares on Friday closed at 14.1 times the $2.59 consensus earnings estimate for 2010 among analysts polled by Thomson Reuters, the P/E ratio drops to 12.5 based on the 2011 projection, and if you take it all the way out to 2013, it drops to 10.7, which looks pretty low when compared to the P/E of 19 at the end of 2007 and 2008.

Commerce looks good for a long-term play for conservative investors and fits in well in a portfolio with a company like Hudson City, because it has a different business model. For investors concerned about a sharp downturn in the market over the short haul, a good strategy is to go in slowly and be ready to double-up in a crash scenario.

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