The Federal Reserve said in a statement last week that it plans to raise interest rates two more times in 2018. The interest hike may pinch borrowers, but is a boon for companies who thrive in higher interest rate environments.
One sector in particular that will benefit from rising rates is the financial sector. Financial companies are required to hold large reserves. Most of these reserves are in the form of bonds, which will enhance financial sector returns as rates rise.
It’s a given rising interest rates will give financials a shot in the arm. So let’s focus on some fundamentally sound micro-cap financials.
Premier Financial Bancorp, Inc. (NASDAQ: PFBI) is a Southeast regional bank based in Huntington, WV. The bank has recently been expanding its footprint in West Virginia. In April 2018 Premier purchased First Bank of Charleston for $33 million.
According to Premier Financial Bancorp President and CEO Robert Walker, this allows the financial institution to compete as a large community bank. The financial company also benefits from the fact that its large out-of-state rivals have fewer ties to West Virginia, providing a greater opportunity to gain market share in the state.
With debt to equity of only .05, Premier has room to expand lending as the economy improves. Compare that to large Bank of America, with a debt to equity ratio of 1.83.
From a chart perspective, Premier Financial recently broke out of resistance just above $18 and is now trading around $19. The stock is now back at levels it was trading at in the late ’90s, and has recently touched intraday all-time highs.
Next, AmeriServ Financial, Inc. (NASDAQ: ASRV) is a Northeast regional bank based out of Johnstown, Pennsylvania. The bank sports a price to book ratio of only .8. Compare that to another Northeast regional bank, Northeast Bancorp (NASDAQ: NBN), with a price to book of almost twice that of AmeriServ Financial at 1.5.
Year-over-year (YoY) earnings at AmeriServ Financial are up over 36%, as earnings in 2018 up over 167%. Currently, AmeriServ maintains a P/E of just over 12.
AmeriServ Financial recently endeared itself to one whale investor in particular, Jeffrey L. Gendell. Mr. Gendell increased his holdings in the financial company by 10% in the first quarter of 2018. He now owns over 2% of the company.
Finally, let’s take a look at a money center bank, Unity Bancorp, Inc. (NASDAQ: UNTY). Unity has been in an uptrend since 2014, but really began to pick up steam starting in 2017. It is the holding company for Unity Bank, with the majority of its customer base in New Jersey.
The stock price acceleration may in part be due to Unity’s average earnings per share growth the past 5 years, which comes in at a whopping 34.6%. This may also account for the slightly higher P/E ratio than the average bank of 14.41.
Unity also knocks the cover off the ball when looking at ROI. Its current trailing twelve month ROI is 28.4%. If UNTY can maintain these numbers with the boost from rising interest rates, the upward trend could easily continue.
Rising interest rates will lend support to all the financials. Focus on strong fundamentals, from companies like Premier Financial Bancorp, AmeriServ Financial and Unity Bancorp, to outpace the industry.
Article By: Steven Adams
Disclaimer: The author and Spotlight Growth has no positions in any of the stocks mentioned in this article. Nor does either party currently have any relationship, or any other conflicts of interest, with any of the companies mentioned in this article. This content is meant for informational and entertainment purposes only and should not be meant as a recommendation to buy or sell any securities. Please visit a licensed financial representative to determine what investments are right for you.