Small Banking Stocks Vault Over Their Bigger Brethren
Weaker earnings. Slowing growth. Rising defaults. A surge in bad loans. Not the ideal environment for making money in the stock market -- and certainly not in banking shares.</br></br>So as bank after bank announces bitter earnings surprises because of dud loans -- the latest being Bank of America this week -- how are investors making money?</br></br>In short, the strategy is to avoid the megabanks focused on corporate lending and buy banks focused on the consumer. This has yielded solid returns as smaller community lenders have soared. "The closer you are to the consumer right now, the better," said David Ellison, manager at bank-fund FBR Fund Advisors, a small Boston money-management firm that has posted returns above 20% far this year.</br></br>Mr. Ellison, for one, pared back his holdings in big regional banks such as Bank of America and FleetBoston Financial, long considered leaders of the banking industry.</br></br>At the same time, he invested in lowly thrifts, unsung mortgage specialists like Golden West Financial and Astoria Financial, both of which have risen despite the current economic environment.