Basswood Capital’s Top Stock Picks

Matthew Lindenbaum, manager of Basswood Capital, has been managing investments through a number of vehicles for 20 years. Before founding Basswood, he was a General Partner at SNL Securities. According to our database of 13F filings, Basswood tends to be overweight the financial sector; the fund has also engaged in some shareholder activism in the area. Read on to see our discussion of some of the fund’s largest holdings as of June 2012 or see the full list of stocks from the 13F.

Basswood’s top holding was Wells Fargo & Company (NYSE:WFC) as the fund reported a position of 1.2 million shares. Wells Fargo’s trailing P/E multiple of 12 is quite reasonable for a company which pays a dividend yield of 2.5%; other large banks may be even better values, though we believe that Wells Fargo has seen less damage to its brand as a result of the financial crisis and deserves at least some premium compared to the rest of its industry. Wells Fargo also trades at a premium to the book value of its equity with a P/B ratio of 1.4. Warren Buffett’s Berkshire Hathaway continued to add to its own position in Wells Fargo during the second quarter and closed June with over 400 million shares of the bank.

Warren Buffett

U.S. Bancorp (NYSE:USB) has a pretty similar profile to Wells Fargo (though it is considerably smaller at a market capitalization of $65 billion). It trades at 13 times trailing earnings and pays a dividend yield of 2.3%. It does stand out in that its premium relative to book value is even higher, at a P/B of 2. We would note that U.S. Bancorp has been doing very well recently, with its earnings last quarter coming in 18% higher than a year ago, mostly due to an increase in revenues but with margins widening as well. The forward P/E multiple on the stock is 11, which is still high relative to peers, so the bank will have to continue to deliver solid growth.

JPMorgan Chase & Co. (NYSE:JPM), as well as Wells Fargo and U.S. Bank, made our list of the ten most popular financial stocks among hedge funds for the second quarter (see the full list of hedge funds’ favorite financial stocks). Basswood liked it as well, owning about 770,000 shares at the end of June. Various events, including the London Whale incident and the resulting poor sentiment towards the company, have left JPMorgan trading at trailing and forward P/Es of only 9 and 8, respectively. It also trades at a slight discount to its book value with a 2.9% dividend yield that edges out the two previous banks.

$14 billion market cap heating, cooling, ventilation, and air conditioning company Ingersoll-Rand PLC (NYSE:IR) was another of Basswood’s top picks with the fund owning just over 600,000 shares. Ingersoll-Rand saw its earnings pick up substantially last quarter, beating analyst expectations for the fourth quarter in a row in the process. The company has quite a bit of exposure to residential, commercial, and industrial construction markets and so would be a way to play a recovery in those areas. It trades at 18 times trailing earnings and 13 times forward earnings estimates.

Lindenbaum and his team added some shares to their position in Belden Inc. (NYSE:BDC) and owned about 680,000 at the end of June. Belden is a $1.7 billion market cap equipment company which provides cables and connectivity products to transfer data, video, and sound. It is a candidate for a value play with a trailing P/E of 14 and a forward P/E of 11, with the company delivering good growth in the second quarter compared to the same period in 2011. Given analyst expectations, the five-year PEG ratio comes in at 1.