Based on key financial metrics such as the price-to-sales ratio, shareholder yield and the price-earnings ratio, the following 5 stocks made the list for top value stocks in the Banks industry. Those looking for value stocks to add to their portfolio may want to use this list as a starting point for further investment research.

Why Focus on Undervalued Banks Stocks?

Value investors seek to buy stocks at a discount to their intrinsic value. Long-term returns show that such strategies are advantageous. Value stocks, as a group, tend to outperform growth stocks over extended periods of time. Typically, value investors perform financial analysis of numerous metrics, don’t follow the herd and are long-term investors.

AAII’s A+ Investor Value Grade is derived from a stock’s Value Score. The Value Score is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, price-earnings ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio, shareholder yield, price-to-book-value ratio and price-to-free-cash-flow ratio. The score is variable, meaning it can consider all six ratios or, should any of the six ratios not be valid, the remaining ratios that are valid. To be assigned a Value Score, stocks must have a valid (non-null) ratio and corresponding ranking for at least two of the six valuation ratios.

What Goes Into AAII’s Value Grade?

Stock evaluation requires access to huge amounts of data as well as the knowledge and time to sift through it all, make sense of financial ratios, read income statements and analyze recent stock movement. AAII created A+ Investor, a robust data suite that condenses data research in an actionable and customizable way suitable for investors of all knowledge levels, to help investors with that task.

AAII’s proprietary stock grades come with A+ Investor. These offer intuitive A–F grades for more than just value. It is possible for a stock to appear cheap based on one valuation metric but appear expensive on another. It is also possible for one valuation ratio to be associated with outperforming stocks during certain periods of time but not others. Some stocks may even have null values for certain metrics like the price-earnings ratio or the price-to-book ratio but not others. An example of this would be a company with losses instead of profits or a negative book value because of heavy borrowing. Negative earnings or book value result in non-meaningful ratios that are left blank or null.

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5 Undervalued Banks Stocks

Of course, there are countless value stocks that are worth mentioning, but this is a concise list of the top 5 undervalued stocks in the Banks industry for Tuesday, August 15, 2023. Let’s take a closer look at their individual scores to see how they measure up against each other and the Banks industry median.

The Value Grade is assigned based on how each stock’s composite valuation compares to all other stocks.

The process for assigning grades starts with each variable for a given stock. The percentile rankings for all valid ratios that a stock has are calculated. So, for instance, a stock could have a price-to-book ranking in the 43rd percentile, a price-earnings ranking in the 67th percentile, a price-to-sales ranking in the 23rd percentile, etc. Then, those rankings are averaged for each stock. (A minimum of two valid variables are required, though all six will be used if available.)

Once the average of the individual variables is calculated, that average is ranked against all stocks. Put another way, each stock’s composite valuation is compared to all other stocks. These ranks are then sorted into quintiles from the cheapest 20% (a grade of A) to the most expensive 20% (a grade of F).

As always, we recommend that you conduct proper due diligence and research before investing in any security. We also suggest that investors utilize numerous grades, not just value, when it comes to deciding whether a company is a good fit for their allocation needs.

Exchange Bank’s Value Grade

Value Grade:

Exchange Bank (the Bank) is a full-service community bank. The Bank provides a range of personal, commercial and trust and investment management services with over 16 retail branches in Sonoma County, a commercial branch in Roseville and Trust & Investment Management offices in Santa Rosa, Roseville and Silicon Valley. The Bank's personal banking products and services include checking, savings, personal loans, home loans and credit cards. The Bank's business banking products and services include checking, savings, loans, credit cards and merchant services. Its services include trust administration, investment management, retirement accounts and estate settlement.

Stocks with a Value Score from 81 to 100 are considered deep value, those with a score between 61 and 80 are value and so on.

Exchange Bank has a Value Score of 93, which is considered to be undervalued.

When you look at Exchange Bank’s price-to-sales ratio at 1.49 compared to the industry median at 2.15, this company has a lower price relative to revenue compared to its peers. This could make Exchange Bank’s stock more attractive for value investors.

Exchange Bank’s price-earnings ratio is 6.08 compared to the industry median at 8.50. This means it has a lower share price relative to earnings compared to its peers. This could make Exchange Bank more attractive for value investors.

Shareholder yield is the sum of a stock’s dividend yield (paid over previous 12 months minus special dividends) and the percentage of net share buybacks over the previous 12 months. Exchange Bank’s shareholder yield is higher than its industry median ratio of 3.92%. Value investors may look for an attractive shareholder yield because it can be a powerful tool for identifying if the company has a good management team.

As one of the most common value metrics, the price-to-book ratio evaluates a company’s current market price relative to its book value. Exchange Bank’s price-to-book ratio is lower than its industry median ratio of 0.95. This could make Exchange Bank more attractive to investors looking for a new addition to their portfolio.

Franklin Financial Services Corp’s Value Grade

Value Grade:

Franklin Financial Services Corporation is a bank holding company for Farmers and Merchants Trust Company of Chambersburg (the Bank). The Bank is engaged in general commercial, retail banking and trust services associated with community banks. It offers a range of banking services to businesses, individuals, and governmental entities. It provides a range of services, such as accepting and maintaining checking, savings, and time deposit accounts, providing investment and trust services, making loans and providing safe deposit facilities. It offers various deposit products including demand deposits (noninterest and interest-bearing accounts), savings, money management accounts, and time deposits to retail, commercial, and municipal customers. Its investment and trust services department offers all of the personal and corporate trust services associated with community bank trust departments, including estate planning and administration, and corporate and personal trust fund management.

Stocks with a Value Score from 81 to 100 are considered deep value, those with a score between 61 and 80 are value and so on.

Franklin Financial Services Corp has a Value Score of 80, which is considered to be undervalued.

Franklin Financial Services Corp’s price-earnings ratio is 10.1 compared to the industry median at 8.5. This means that it has a higher price relative to its earnings compared to its peers. This makes Franklin Financial Services Corp less attractive for value investors.

Franklin Financial Services Corp’s price-to-book ratio is lower than its peers. This could make Franklin Financial Services Corp more attractive for value investors when compared to the industry median at 0.95.

You can read more about Franklin Financial Services Corp’s key financial metrics like shareholder yield, price-to-free-cash-flow and EV/EBITDA ratio, or learn more about its Momentum and Growth Grades, by subscribing to A+ Investor.

HMN Financial, Inc.’s Value Grade

Value Grade:

HMN Financial, Inc. is a stock savings bank holding company of Home Federal Savings Bank (the Bank). The Bank operates retail banking and loan production facilities in Minnesota, Iowa, and Wisconsin. The Bank?s portfolio includes real estate, which includes single-family, multi-family and commercial, construction and development; consumer; and commercial business. It offers conventional fixed rate single-family loans that have maximum terms of 30 years. It typically sells the majority of fixed rate loan originations with terms to maturity of 15 years or greater that are eligible for sale in the secondary market. The commercial real estate and multi-family loan portfolio includes loans secured by motels, hotels, apartment buildings, churches, manufacturing plants, land developments, office buildings, movie theaters, shopping malls, nursing homes, restaurants, warehouses, and other non-residential building properties primarily located in the upper Midwestern portion of the United States.

Stocks with a Value Score from 81 to 100 are considered deep value, those with a score between 61 and 80 are value and so on.

HMN Financial, Inc. has a Value Score of 79, which is considered to be undervalued.

HMN Financial, Inc.’s price-earnings ratio is 11.7 compared to the industry median at 8.5. This means that it has a higher price relative to its earnings compared to its peers. This makes HMN Financial, Inc. less attractive for value investors.

HMN Financial, Inc.’s price-to-book ratio is higher than its peers. This could make HMN Financial, Inc. less attractive for value investors when compared to the industry median at 0.95.

You can read more about HMN Financial, Inc.’s key financial metrics like shareholder yield, price-to-free-cash-flow and EV/EBITDA ratio, or learn more about its Momentum and Growth Grades, by subscribing to A+ Investor.

Merchants Bancorp’s Value Grade

Value Grade:

Merchants Bancorp is a diversified bank holding company. The Company?s subsidiaries include subsidiaries, Merchants Bank of Indiana (Merchants Bank), Farmers-Merchants Bank of Illinois (FMBI) and Merchants Asset Management, LLC (MAM). It operates through three segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking. The Mortgage Banking segment originates, and services government-sponsored mortgages for multi-family and healthcare facilities. The Mortgage Warehousing segment funds agency eligible residential loans from the date of origination or purchase, until the date of sale in the secondary market, as well as commercial loans to non-depository financial institutions. The Banking segment provides a range of financial products and services to consumers and businesses, including retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and Small Business Administration (SBA) lending.

Stocks with a Value Score from 81 to 100 are considered deep value, those with a score between 61 and 80 are value and so on.

Merchants Bancorp has a Value Score of 78, which is considered to be undervalued.

Merchants Bancorp’s price-earnings ratio is 6.5 compared to the industry median at 8.5. This means that it has a lower price relative to its earnings compared to its peers. This makes Merchants Bancorp more attractive for value investors.

Merchants Bancorp’s price-to-book ratio is lower than its peers. This could make Merchants Bancorp more attractive for value investors when compared to the industry median at 0.95.

You can read more about Merchants Bancorp’s key financial metrics like shareholder yield, price-to-free-cash-flow and EV/EBITDA ratio, or learn more about its Momentum and Growth Grades, by subscribing to A+ Investor.

Bank of N T Butterfield & Son Ltd’s Value Grade

Value Grade:

The Bank of N.T. Butterfield & Son Limited (the Bank) offers banking services, consisting of retail and corporate banking, and wealth management, which consists of trust, private banking, and asset management. The Bank provides lending products and services including residential mortgage lending, automobile lending, credit cards, consumer financing, and overdraft facilities to its retail customers, and commercial real estate lending, commercial and industrial loans, and overdraft facilities to its commercial and corporate customers. The Bank operates in four segments: Bermuda, the Cayman Islands, the Channel Islands and the UK and Other. The Bermuda and Cayman Islands segments offer retail banking and wealth management. The Channel Islands and the UK segment offers corporate banking, wealth management and residential property lending. The Other segment includes its operations in the jurisdictions of The Bahamas, Canada, Mauritius, Singapore and Switzerland.

Stocks with a Value Score from 81 to 100 are considered deep value, those with a score between 61 and 80 are value and so on.

Bank of N T Butterfield & Son Ltd has a Value Score of 76, which is considered to be undervalued.

Bank of N T Butterfield & Son Ltd’s price-earnings ratio is 5.9 compared to the industry median at 8.5. This means that it has a lower price relative to its earnings compared to its peers. This makes Bank of N T Butterfield & Son Ltd more attractive for value investors.

Bank of N T Butterfield & Son Ltd’s price-to-book ratio is lower than its peers. This could make Bank of N T Butterfield & Son Ltd more attractive for value investors when compared to the industry median at 0.95.

You can read more about Bank of N T Butterfield & Son Ltd’s key financial metrics like shareholder yield, price-to-free-cash-flow and EV/EBITDA ratio, or learn more about its Momentum and Growth Grades, by subscribing to A+ Investor.

Other Banks Stock Grades

Value is just one of the five Stock Grades included in our A+ Investor service. AAII members can see the top-graded stocks—those with grades of A or B for value, growth, momentum, earnings estimate revisions and quality—on the A+ Stock Grades Screener.

Also, if you want full access to all of AAII’s premium services, you can subscribe to one convenient bundled plan called AAII Platinum where you can try out A+ Investor, AAII Dividend Investing, the Stock Superstars Report, Growth Investing and VMQ Stocks. With the other premium services, you can dive deep into additional metrics, portfolios, commentary and information about Banks stocks as well as other industrys.

Choosing Which of the 5 Best Banks Stocks Is Right for You

Choosing which value stocks to invest in will ultimately depend on your individual goals and allocation; however, comparing similar value stocks in the same industry can help you analyze which might be better investments for you in the long run. So, let’s take a look at the Value Grade for all of our stocks.

• Exchange Bank stock has a Value Grade of A.
• Franklin Financial Services Corp stock has a Value Grade of B.
• HMN Financial, Inc. stock has a Value Grade of B.
• Merchants Bancorp stock has a Value Grade of B.
• Bank of N T Butterfield & Son Ltd stock has a Value Grade of B.

Now that you have a bit more background about each of the 5 undervalued stocks in the Banks industry as well as their overall grades, it’s time for you to conduct additional research to see if these could fit your portfolio needs based on your goals and risk tolerance. AAII can help you figure out both and identify which investments align with what works best for you.

We do so through a program of education that teaches you to invest for yourself and become an effective manager of your own wealth—no more relying on others for your financial independence. You can rely on AAII for timeless articles on financial planning and stock-picking, unbiased research and actionable analysis that makes you a better investor.

A+ Investor adds to that qualitative teaching by giving you a powerful data suite that helps you whittle down investment decisions to find stocks, exchange-traded funds (ETFs) or mutual funds that meet your needs.

Additional Resources About Banks Stocks

Want to learn more about Banks stocks to see if they could be the right investment for you? Check out some additional resources and articles to help you on your financial journey.

• 5 Undervalued Banks Stocks for Tuesday, August 15
• Which Is a Better Investment, Community Bank System, Inc. or Bancolombia SA (ADR) Stock?
• 3 Undervalued Banks Stocks for Monday, August 14
• What You Need to Know About Credicorp Ltd. (USA)'s Q2 Earnings

AAII Disclaimer

We make no representations or warranties that any investor will, or is likely to, achieve profits similar to those shown, because past, hypothetical or simulated performance is not necessarily indicative of future results. Before making an investment decision, you should consider your circumstances and whether the information on our content is applicable to your situation. This information was prepared in good faith and we accept no liability for any errors or omissions. The full disclaimer can be read here.