Yesterday I was aggressively buying regional banks. I ended up buying nine individual regional banks and a regional bank ETF. The stock prices on these banks are down significantly (some down more than 70%) and the equity is just too cheap to pass up. I’m guessing I will lose my entire investment on a couple of the names. Another couple will probably be value traps. One might get bought out. And the remaining ones will likely recover to post valuation levels in the next 12-24 months. I’m planning to hold these names for the long-term to potentially realize a 100% recovery in the equity and a continuation of the dividend. At current valuations the implied dividend yield is over 20% should business return to normal.

I have never been a big bank investor but I have tried to make it a point recently to understand the sector. Earlier this year I started digging into community banks and mutual conversion opportunities. The sector is hidden from the rest of Wall Street and you can find overcapitalized banks trading at a steep discount to replacement value. In addition, the mutual conversion aspect of the sector provides a torque to all special situation investors out there (as popularized by Seth Klarman and Peter Lynch).

Since I never spent years studying the sector, I am by no means an expert on the space. The balance sheets can be confusing. Deposits are assets until rates rise and depositors can move their funds elsewhere — like treasuries to get a higher risk-free return. Assets like treasuries, purchased at the top of the cycle, bleed into shareholder’s equity as mark-to-market losses pile up. And when loans start to go sour everything piles up and the equity collapses. People freak out. Money is lost and banks collapse like we have seen with Silicon Valley Bank and Signature Bank. So far in 2023 two banks have failed and based on current valuations the market is pricing in quite a bit more.

Despite the potential for things to get much worse within the financial sector, I love buying assets when no one else wants to own them. The best investments are always made during the worst of times.

Given my lack of knowledge on specific names in the regional banking sector I have decided to take an equally weighted basked approach to my allocation of stocks in the space. I purchased nine regional banks all equally weighted besides one (the one I bought more had aggressive insider buying). I also purchased a regional bank ETF. Going forward I plan to buy additional beaten down regional banks as I think the selloff here is too dramatic as the Federal Reserve will likely pivot and stop raising rates (or even tighten) based on the moves in the treasury markets.

I think the move in regional bank stocks is timely and spending months analyzing each name will prove to be a waste of time. When equity prices in an entire sector drop this dramatically in a short period of time it pays to move quickly, own a basket of names and have a long-term view of the business. Investors tend to sell first and analyze later. Equity prices tend to recover quickly in these kind of situations and I think spending time building models, talking to management teams and understanding individual bank business models will be a waste of time.

My process to own the space today was to buy the most beaten down names I could find. I was buying names down 50-70%. They were getting halted every five minutes. I haven’t seen anything like this since COVID-19 and I am still kicking myself for not being as aggressive during the COVID-19 crash as I should have been. Going forward, my plan is to buy regional banks that have seen their equity prices collapse, along with insiders buying in the open market.

The best indication that a stock is undervalued is when an executive or a board member loads up on their own stock — especially at a steep discount to replacement value. To my surprise, this has been happening all day. Insiders have been very aggressive buying their own stock in the beaten down banks they work for. This is the most insider buying I have seen in a sector in a long-time. If this isn’t an indication that bank stocks are cheap I don’t know what is.

I created a list of all the regional bank insider buying that has occurred over the past three days. My goal is to find the most beaten down bank stock with the most aggressive insider buying. The preliminary list should be helpful for investors and research analysts interested in purchasing beaten down bank stocks with bank executives eating their own cake.

Fortunes will be made on this recovery…