This column was originally published on RealMoney on Aug. 10 at 2:02 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Yield curve concerns have many investors shying away from banks. But there are compelling reasons not to overlook
Founded to serve the Korean-American community, it has been successful in both its mission and its business. This is a large, highly entrepreneurial population. The number of Korean immigrants in this country numbered about 11,000 in 1960. But by 2000, this population had reached 1 million. Add in children and undocumented immigrants, and the number swells to more than 1.5 million. California, where Nara is headquartered, has the largest Korean community in the country, followed by New York.
With 16 full-service branch operations in California and New York and eight loan production offices in other states and Seoul, Korea, it offers a full range of commercial banking and consumer financial services.
The bank has been a star performer. In just-released financials for the second-quarter, ended June 30, net income increased 28%, as did earnings per share. For the first half of the year, net income increased 39%, while EPS rose 41%. Its stock currently trades around $14.
Not only does the bank address a desirable market and have a strong track record, but two
guru strategies I follow, those of Peter Lynch and Martin Zweig, indicate this bank is a fine, money-making machine.
The Peter Lynch Strategy
Based on my reading of Peter Lynch, Nara is a "fast grower," in the strategy's lingo, because its growth rate exceeds 20%. This is a very desirable category in which to be.
Also, the bank's P/E/G ratio (its price-to-earnings ratio relative to the growth rate) is 0.72, which is favorable. Lynch's strategy gives preference to companies with a P/E/G of 1.0 or less.
The Lynch strategy favors companies with several years of fast earnings growth, because they have a proven formula for growth that in many cases can continue many more years. The ideal growth range: 20% to 50%. Nara's is 21.5%, based on the average of the three-, four- and five-year historical EPS growth rates -- this is considered very good.
The Lynch methodology uses the equity-to-assets ratio as a way to determine a financial intermediary's health, with 5% being the minimum. Nara's E/A ratio gets a passing grade at 7.0%.
Last, Lynch's strategy employs return on assets (a year's earnings divided by total assets expressed as a percentage) as a way to measure a financial intermediary's profitability. Nara's ROA also gets a passing grade of 1.5%, which exceeds the minimum 1% required.
The Martin Zweig Strategy
Martin Zweig's strategy, as I interpret it, looks for a P/E greater than 5 to eliminate weak companies. But it also requires that the P/E be not more than three times the P/E of the current market -- as represented by the
-- because such a situation is much too risky. Under Zweig's methodology, the P/E also should never be greater than 43. Nara's P/E is 15.4, based on trailing 12-month earnings, while the current market PE is 21.0. Therefore, it passes this test.
Earnings growth must be supported by a comparable or better rate of growth in sales, not just by cost-cutting or other nonsales measures. Nara's revenue growth is 19.6%, while its earnings growth rate is 21.5%, based on the average of the three-, four- and five-year historical EPS growth rates. Again, Nara earns a passing grade.
The Zweig strategy looks at earnings from different angles, which include requiring a current positive EPS and a positive EPS for the quarter one year ago. Nara has both. The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. Nara's growth rate was not only positive but an impressive 57.1%.
A stock should not be considered under the Zweig methodology if it posted one or more quarters of skimpy earnings, which I interpret as less than half the historical growth rate. Therefore, the final Zweig test relating to earnings trends compares the earnings growth rate of the prior three quarters with the long-term EPS growth rate. The growth rate in each of the prior three quarters should be better than half the long-term EPS growth rate. The growth rates for Nara's three previous quarters were 26.7%, 25.0% and 60.0%, while half the long-term EPS growth rate for Nara was 10.7%. Nara passes this last trend test; there have been no meager earnings quarters in the last year.
After considering earnings trend stability, the Zweig strategy focuses on earnings acceleration. This component of the methodology has two tests:
1. The strategy wants to make sure the most recent quarter doesn't represent a slowdown in EPS growth. To that end, it looks at EPS growth for the most recent quarter and compares that to the average growth of the three previous quarters (measured from last year's comparable quarters to this year's); to pass this test, the most recent quarter needs higher growth than the three-quarter average. Exception: If the most recent quarter had really high growth (30% or more), it's OK if that growth is lower than the three quarters' growth rate.
Nara's average earnings growth rate for the prior three quarters was 37.0%, while the growth rate of the current quarter was 57.1%. This performance earns the company a passing grade on both counts.
2. The EPS growth rate for the current quarter should be greater than or equal to the historical growth rate. The numbers for Nara are 57.1% for the current quarter and 21.5% for the historical growth rate, giving the stock its one failing grade. This is acceptable, because Nara passes all the strategy's other tests.
The Zweig strategy likes to see steadily increasing earnings for the past five years. This does not hold true for Nara, whose earnings dropped in 2001 and again in 2002, though they have increased since. This is the one test Nara fails. A final test requires the long-term earnings growth rate to be at least 15% per year; Nara's is 21.5%, which gives it a passing grade.
By investing in Nara, you are investing in a bank that targets a specific and growing community, has a good track record of growth and profitability and has the support of two of the guru strategies. This is a stock I believe you can bank on, so buying it at this price level is a good opportunity, given that it is of strong interest to two of my guru strategies.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Nara Bancorp to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
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John P. Reese is founder and CEO of Validea.com, an Internet investment research and stock analysis firm selected as one of Forbes Best 100 sites on the Web. He is also co-author of
The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback.
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