Community Bank Stocks Are Overvalued, Overbought

NEW YORK (TheStreet) -- Earnings season for community banks is essentially over, and the FDIC-insured publicly traded institutions I have been profiling had mixed results at best. Only 5 of the 23 banks in my buy-and-trade universe of community banks beat their earnings estimates, nine matched expectations and nine missed their EPS projections.

Of the 23 community banks, three have been downgraded to hold from buy, leaving us with eight buy rated stocks and 15 hold rated stocks.

My benchmark for community banks is the America's Community Bankers Index ( ABAQ), which represents 389 publicly-traded community banks.

The weekly chart for ABAQ (181.59) is positive but overbought with the five-week modified moving average at 176.22 and the 200-week simple moving average at 155.43. ABAQ is below its April 2010 high at 184.90. My quarterly value level is 158.71 with a monthly pivot at 181.63 and weekly risky level at 188.42.

Chart Courtesy of Thomson/Reuters

The finance sector is 17.0% overvalued with the banks-northeast industry 26.7% overvalued, the banks-southeast industry 12.7% overvalued, the banks-midwest industry 3.7% overvalued, the banks-west industry 3.9% overvalued and the finance savings and loan industry 28.5% overvalued.

On Dec. 5, I wrote, FDIC Reports Positive Banking System Data where I presented the data and my analysis of the FDIC Quarterly Banking Profile for Q3 2012. I concluded that while the banking system has been reducing exposures to bad real estate loans, the exposures among community banks remain large by longer-term standards.

Then on Dec 11, I wrote, Construction and Development Loan Exposure Continues to Plague Community Banks where I last profiled the community bank stocks I am profiling today.

My suggested strategy for these bank stocks is to book profits on strength to risky levels. With an unfavorable risk reward a suggested allocation to these names should be reduced by at least 50%.

I am in Fort Lauderdale, Fla., today and tomorrow for the Information Management Network's tird annual Florida Bank & Financial Institutions Special Asset Executive Conference on Real Estate Workouts. I will be a panelist Tuesday morning explaining why I think that "The Great Credit Crunch Continues in 2013." My focus is the FDIC Quarterly Banking Profile. Send me an email if you'd like a copy of my Power Point Presentation.

A major point that I will be making to the Florida bankers present is that 60% of the 213 FDIC-insured financial institutions headquartered in Florida are still overexposed to commercial real estate loans. This is significant as nationally only 23.9% of all banks have over-exposures to CRE loans.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.

The Florida publicly traded bank in today's table is Centerstate Banks ( CSFL), ($8.71) which has a buy rating and is 37.4% undervalued. The weekly chart profile is positive but overbought with the five-week modified moving average at $8.60. CSFL began 2012 slightly overexposed to CRE loans, but that ended in Q2 2012. CSFL has an elevated pipeline with 91.9% of its real estate loans fully funded. My semiannual value level is $7.13 with a monthly pivot at $9.37 vs. its Sept. 19 high at $9.22. My annual risky level is $14.26.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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