Basswood Capital’s Top Stock Picks

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Matthew Lindenbaum, manager of Basswood Capital, has been managing investments through a number of vehicles for 20 years. According to our database of 13F filings, Basswood tends to be overweight the financial sector with about half its capital invested in financial stocks at the end of the second quarter. The fund has also engaged in some shareholder activism in the area, directly engaging with management to encourage them to follow a path that Basswood believed would help create shareholder value. 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 than many of its peers 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.

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 than the larger bank’s, at a P/B of 2. 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. Basswood owned 1.2 million shares of U.S. Bancorp at the end of the second quarter.

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 (including concerns that its trading desks do not have appropriate risk controls, and may experience similar losses in the future), have left JPMorgan trading at trailing and forward P/Es of only 9 and 8, respectively. This makes it cheaper than the previous two banks on that basis. JPMorgan Chase also trades at a slight discount to its book value, as opposed to a premium. We would rather own it than Wells Fargo or U.S. Bancorp.

$14 billion market cap heating, cooling, ventilation, and air conditioning company Ingersoll-Rand PLC (NYSE: IR), at the #4 slot in the 13F portfolio, was Basswood’s largest non-financial pick 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- not bad if it can deliver on future growth.

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. If investors review the company further and the value checks out, it could be considered cheap.

As we mentioned earlier, we find JPMorgan Chase to be a better value than U.S. Bancorp or Wells Fargo; the other banks may look good compared to the overall market but on an earnings or book basis JPMorgan is considerably cheaper. Ingersoll-Rand could be considered alongside homebuilders if an investor is confident in a housing recovery. As for Belden, we think it is worth taking a closer look at the company on value grounds.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.The Motley Fool owns shares of JPMorgan Chase & Co. and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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