Tuesday, March 27, 2012

TCBI: Regional banking

Texas Capital Bancshares Inc. (TCBI) is a regional banking company headquartered in Dallas, Texas. There is little to be said about it as a business. It's a bank. It lends money. It stresses its service. It backs entrepreneurs. The photos on the website look vaguely Texan.

End of story.

Texas Capital Bancshares had the most bullish chart among 20 stocks added today to the Zacks top buys list. However unexcited I may be about regional banks, there are some analytical models floating out there that obviously like TCBI a lot.

It isn't a far-flung banking empire by any stretch. The company has a dozen banking locations around Texas, eight of them accounted for by three metro areas: Dallas-Forth Worth, Houston and Austin.

So what has gotten the algorithms all excited about TCBI?

First, regional banks are sort of the flavor of the week. A couple of headlines from the past eight hours: "Regional banks ready to rally" (CNNMoney), "Regional banks on the upsurge as profits surge and loan books improve" (MarketWatch).

Second, Texas Capital Banshares' return on equity of 13% shows that it reinvests its earnings more efficiently than 93% of all regional banks.

Banks always have high debt/equity rations, and TCBI is no exception: Long-term debt is triple equity.

Institutions nearly all of the shares, and the price is high, requiring $4.03 in shares to control a dollar in sales.

Accelerating earnings in all but one of the past 11 quarters surely must also be a factor.

On the chart, the most recent leg up began Oct. 4, 2011 at $21.70 and has since risen to Monday's high of $36.61. The price moved into blue-sky territory last December.

So what's not to like? One aspect is common to all small regional banks: They're small and regional.

There is a degree of safety in financial institutions spread across many states, where a downturn in the auto industry, for example, won't necessarily cause much harm to the bottom line.

A small regional has much less diversification. As goes Texas, so goes TCBI.

A second aspect is market liquidity. Average volume is 369,000 shares. That produces a small options inventory with little open interest and wide bid/ask spreads. That's another way of saying that TCBI is expensive to trade, and once I'm in a position, it may not be easy to get out.

Implied volatility, at 39%, is at all-time lows, suggesting that any position I would open on TCBI should be net long. That levelof volatility provides a 68.2% chance that the price will close between $31.06 and $38.86 a month from now.

Next earnings will be published in July.

Decision for my account: I'll be passing TCBI because of the low liquidity. And as I hinted above, I just have misgivings about small regional banks. In terms of the chart and the financials, however, there's nothing not to like.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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