7 Buy Rated Community Banks

NEW YORK ( TheStreet) -- A week ago I wrote, Bull Market Will End Without Big-Bank Leadership and on that day the PHLX KBW Banking Index (BKX) stayed above its 50-day simple moving average at $55.78. This week the BKX had what technicians call a breakout as the March 15 high at $57.60 was taken out to the upside. Wednesday's high at 58.85 was just above the April 2010 high at 58.81. This is a story where technical momentum has trumped overvalued fundamentals.

Traders and investors considering following the fundamentals and technicals may want to consider the more risky smaller community banks. The America's Community Bankers Index (ABAQ) is lagging the BKX and remains below its March 26 high at 190.57.

Investors need to be careful when investing in community bank stocks, as the smaller banks remain under the stress of the Great Credit Crunch, which began at the end of 2007 and continues in 2013.

The ghost of TARP continues! In a report compiled by SNL Financial 113 banks and thrifts missed their dividend payments that were due on Feb. 15. This statistic was as high as 139 FDIC-insured institutions in May 2012, with the decrease since then resulting from redemptions and auctions of related preferred stock.

If you recall TARP loans to banks were issued under the Capital Purchase Program, and under this program banks are required to pay the Treasury quarterly dividend payments. The missed payments are on just $2.44 billion of the $204.9 billion received by 707 FDIC-insured financial institutions. Many of the banks are being told by their state regulators not to make these payments unless they can raise new capital. This continues to be difficult and thus I consider this as evidence of continued stress among community banks.

The number of buy rated banks continues to decline. Among the 133 publicly-traded community banks in the northeast only one has a buy rating according to ValuEngine. Among the 159 banks in the southeast only ten have buy ratings. Among the 72 in the Midwest only five are rated buy or better. Among the 87 banks in the west only five have buy ratings. Among the 43 banks in the southwest none have buy ratings. Among the 166 savings and loans only eight have buy ratings. Difficulty maintaining a buy rating is a sign of stress in earnings related data. Only two of the seven buy rated community banks I profile today beat EPS estimates.

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