I have seen a few articles lately hinting at the fact that the market is headed for downturn as retail investors, often referred to as Mom & Pop in these bearish outlooks, rush to dump their cash back into equities. I am assuming that the grounds for this assumption are that the average retail investor is uneducated, destined to pour their hard earned and meticulously saved dollars into some overvalued blue chip.
t is time to empower yourself as an investor and break the chains that are mega and large cap companies. Market cap has very little indication as to the future performance of a company (though it can hint at when things are overvalued). You do not have to look far to identify profitable and stable businesses that just happens to be smaller in size (for now). A great place to start to research some smaller cap companies is regional banks.
Regional banks only operate in a small part of the country. These banks tend to be more conservative in not only their investments, but also in their loan origination. The companies tend to have lower volatility in relation to the overall market, pay nice dividends, and operate with high profit margins. We will look at three regional banks: KeyCorp (NYSE:KEY), Umpqua Holdings Corp (NASDAQ:UMPQ), and Great Southern Bancorp, Inc. (NASDAQ:GSBC), and identify why small cap companies deserve your attention as much as the blue chips.
KeyCorp operates as the holding company for KeyBank National Association, which provides various banking services in the United States. As of Dec. 31, 2012 the company operated 1,088 retail banking branches in 14 states; a telephone banking call center; and 1,611 automated teller machine in 15 states. KeyCorp (NYSE:KEY) trades at just 11.18 times forward earnings and at book value. KeyCorp (NYSE:KEY) is one of the best regional banks in terms of operating efficiently. The bank is able to turn over 20% of its revenue into profits, one of the highest profit margins in the regional banking industry. The company also has a dividend yield of 1.6% with a payout ratio of just 22%. This low of a payout ratio will allow KeyCorp (NYSE:KEY) to increase dividend payouts even if revenue does not grow as expected. KeyCorp (NYSE:KEY) also manages its debt very well, with a debt-to-equity of just 0.76 and a current ratio well above 2.0.
Umpqua Holdings Corp (NASDAQ:UMPQ) operates as the holding company of Umpqua Bank and Umpqua Investments, Inc., which provide commercial and retail banking and brokerage services to corporate, institutional, and individual customers in the United States. Umpqua Holdings Corp (NASDAQ:UMPQ) has a debt-to-equity of only 0.3 and currently trades at just 15.34 times forward earnings. The company also trades at just 0.87 times book value and 8.32 times free cash flow. Umpqua Holdings Corp (NASDAQ:UMPQ) is expected to grow earnings 11.5% annually over the next five years. Umpqua Holdings Corp (NASDAQ:UMPQ) also sports a nice dividend, which currently yields 3.17% and their payout ratio of 42% is respectable. The company’s PEG ratio also sits at an optimal 1.33–typically a PEG between 0.8 and 1.8 means a company is trading at a discount to its future earning potential.