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Over the past two decades many financial services companies, such as

J.P. Morgan Chase

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Bank of America

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, have built themselves into giants through aggressive acquisitions in order to provide a financial supermarket of services.

However, mature conglomerates like these have saturated their markets, and we believe investors should look to smaller, more focused companies that can deliver outsized earnings growth. One such company is

Commerce Bancorp

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, which concentrates on consumer banking.

We would add Commerce to the

Breakout Stocks

model portfolio if it was a smaller company; our universe is limited to stocks under $5 billion in market cap. But we still wanted to pass it on to readers as a stock to consider.

When it comes to branch banking, Commerce is clearly the smartest in the business. Commerce has a cutting-edge strategy in consumer banking, aiming to out-service competitors rather than undercutting them on price. For example, Commerce's branches open earlier in the morning and close later in the evening than competing banks, and don't stick customers with hidden fees.

While other banks such as

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are expanding their branch hours, Commerce is at an advantage because the bigger banks are adding an extra layer of operating expenses (worker salaries, etc.), while Commerce was built from the ground up with this expense in mind. Some see Commerce's competitors expanding their branch hours as a competitive threat, which may be true, but it is also confirmation of Commerce's strategy.

Commerce's customer-focused strategy has allowed it to grow its deposits dramatically faster than its competitors'. According to Capital IQ, total deposits grew from $7.4 billion in 2000 to $34.7 billion at the end of 2005, an increase of 368%. This drove earnings growth of more than 20% annually for the same period. For comparison,


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grew its deposits by 97% during the same period, with annual earnings growth of 10%.

With about 350 branches now, serving primarily the New Jersey and New York areas, Commerce is aiming to expand its network to roughly 700 branches by 2009. In 2005, the company made its first inroads into the Washington, D.C./Baltimore and southeast Florida markets, and is committed to entering the Boston area in the future, although the company has not given a firm deadline on this. In addition, we would not be surprised to see Commerce making moves to penetrate other parts of the country.

At 18 times expected 2006 earnings of $1.82 a share, Commerce shares are expensive relative to the major banks such as Citigroup, which trade at closer to 10 to 12 times expected 2006 earnings. However, given the company's long-term growth potential, especially as it continues to penetrate the lucrative New York and Florida markets, investors should at least consider the stock. Plus, 16.1% of the float is sold short, so when the

Federal Reserve

signals an end to the interest rate hikes, it's possible we could see aggressive short-covering, driving shares substantially higher. In the meantime, the large number of short positions could limit downside as it implies a great deal of negativity being reflected in the current share price.

Though the timing is unclear now, should the Fed begin cutting rates, Commerce's fast deposit and loan growth could allow it to demonstrate dramatic earnings growth as it continues to take share in important markets. So, conservative investors should probably wait until the Fed signals it is ready to cut rates before building a position in Commerce. On the contrary, investors with a healthy appetite for speculation and a long-term time horizon can consider taking a small position in Commerce here and adding to it on weakness.

If we could add Commerce, we would take a half-sized position -- 2% to 2.5% of the model portfolio -- at the current quote of $33.14. We would then wait for a pullback close to $30 a share to double our original position.

Commerce is exactly the type of company we like. It focuses on one market, consumer banking, rather than being mediocre in a dozen different business lines. Commerce thinks of itself as more of a retailer than a traditional bank, and we tend to agree. In a mature and somewhat commoditized market like retail banking, banks must make great strides to stand out from the pack. Commerce does that by focusing on making the often-aggravating experience of dealing with a bank as painless as possible.

The TSC Breakout Stocks Team is Michael Comeau and William Gabrielski, research associates at In keeping with TSC's editorial policy, they don't own or short individual stocks. They also don't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. For more information about Breakout Stocks, please

click here.