How To Spot Potential 'Trade Of The Decade' Bargains

Most investors continue to ignore what is developing with the smaller regional and community banks.

For some reason, they would prefer to continue to match wits with the large institutions and professional traders as to what Apple AAPL or Facebook FB shares might do over the short- to intermediate-term than to earn higher returns from lower-risk bank stocks that are facing a merger and consolidation wave that could last the next 10 years.

The last time we saw a banking industry collapse, the smaller banks went up by a factor of 10 over the next eight years or so.

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The same situation is setting up today, and most have chosen to just ignore this powerful opportunity.

More Than Just Technicals

One of the reasons is that you can't just glance at a chart and draw imaginary lines to determine buying and selling points for these stocks. Many of them are somewhat illiquid, and the technical patterns used to make guesses about price action simply do not work. Often there are simply not enough price points for the major technical indicators to give investors any information.

In fact, there is not going to be many information sources at all. You have to do the leg work yourself or find someone who specializes in these stocks to guide you. The talking heads on television won't be talking about small banks. The major websites won't be talking about them, as the market capitalization of many of them is too small for them to bother mentioning.

The same is true of the major brokerage firms and research boutiques. Institutional interest is small, so it is not worth paying someone to cover the sector. You cannot simply rely on tips and charts in this sector.

Seek Out Information

One can, however, find a guide to help uncover potentially profitable bank stocks to benefit from the trade of the decade unfolding in the sector. The people who know the most about the smaller banks are the people who run the banks.

The officers and directors know more about the condition of the balance sheet and the prospects of their bank than anyone else at any given point in time.

They know more about the local economy and real estate markets in their service area than we as outside investors can ever discover. Officers and directors can be a Kit Carson as people go in search of banks stocks to benefit form trends in the industry.

Using the excellent database at InsiderInsights.com, anyone can run some quick checks to see how effective  guides have been at finding banks stock with the potential to beat the market. When looking at bank stocks that had insider buying in 2012, 97 percent of them are higher in price today (remember, this is long-term investment, not a day trade).

The average return has been 65.84 percent, beating the S&P 500's 50.50 percent return since January 2012. Bank stocks with insider buying in 2013 have also done well, as 86 percent of them are higher in price today, and the average return of 37.4 percent compares favorably with the S&Ps 36.22 since January 2013.

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The only variable used in this quick test was insider buying -- no filters for price to book tangible book value, balance sheet and loan portfolio quality, or capital adequacy. It is quite possible that returns could be magnified by doing some investigation after filtering for insider buying. It is just common sense to expect that strong, cheap banks where officer and directors are opening their checkbooks to buy shares would consistently do better than just the raw screen results.

Using InsiderInsights to search for more recent buying shows that in the last 90 days, there has been buying at 14 banks that trade below book value and could be candidates for a trade of the decade portfolio.

Banks To Watch

Some of the heaviest buying has been at First Citizens Banc Corp FCZA of Sandusky, Ohio. In the last three months, four officers and directors have combined to buy $179,795 of stock in the bank they oversee.

The stock is currently priced at just 80 percent of book value, so it's a potential bargain of long-term investors. Farmers Capital Bank Corporation FFKT of Frankfort, Kentucky, has also seen strong buying with six officials buying a combined total of $115,998 of stock, with the shares trading below book value.

Tracking the buying activity of officers and directors of small regional and community banks is a great way to spot potential trade of the decade bargains. They know more about their institution than anyone else and can be a fantastic information source for long-term investors looking to reap the huge long term profits of this sector over the next 10 years.