Small-cap banks a buying opportunity right now: fund manager

Volatility continues on Wall Street as investors search for clues to the health of the American economy.

U.S. markets decisively sold off after the Federal Reserve’s September meeting, when the central bank kept rates steady. The big question now is – will it be October, December or even next year when interest rates start to rise.

This uncertainty is presenting an opportunity for some sectors, according to Jason O’Donnell, chief investment officer at Bluestone Financial Institutions Fund.

Key interest rates rising is “generally not going to be good for the broader equity markets,” noted O’Donnell. “But…the small-cap bank arena has a great deal of leverage to rising interest rates,” he added.

Another reason he likes the sector is because “a tremendous amount of bank on bank acquisition activity is currently underway.”

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Bank of the Ozarks

“Banks of the Ozarks (OZRK) is drawing earnings per share currently around 20% to 25% organically. In addition, they’re also participating in this whole bank M&A wave that we’re seeing,” said O’Donnell. The fund manager expects the bank to make “a transformative merger here at some point over the next 12 months, which we think will take this stock significantly higher.”

LegacyTexas Financial

Despite being located in Texas, O’Donnell thinks LegacyTexas Financial Group (LTXB) is isolated from the turmoil in the energy markets. “We think some of the valuation here is being compromised by what’s happening in energy and not rightfully so,” he said. “We actually see them as a potential seller so we think these guys can actually go out and sell their bank for a significant premium, maybe at some point in the next 12 to 18 months,” said O’Donnell.

 

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