It comes as no secret to long term investors that the stock market is on the high side of fair value right now.
The Schiller PE ratio is currently 25.9 which gives a forward return projection of less than one percent over the next five years. Ned Davis Research pointed out recently that the Price to Sales ratio for the S&P 500 is as high as it has ever been and the return going forward from this level is likely to be negative for the next five years.
However running away and hiding is not the best course of action. Overvalued markets can keep going higher for an extended period of time before finally collapsing. Investors still need to find a way to get money to work in situations that can offer high returns but will not destroy capital when the market does finally reprice to rationality.
The best way to achieve these seemingly incompatible goals right now is to go banking.
Conditions in the community banking sector are perfect for long-term returns that are substantially above average and many of them are priced to offer a margin of safety. One of two things is likely to happen to the financially-sound community banks over the next few years.
First is that many of them will be acquired as the costs of regulatory compliance and the lack of organic growth opportunities make it unwise to remain independent. The second is that others will muscle up, perhaps engage in a merger of equals with a similar size institution, and aggressively market against (and take local market share) from the unloved big banks that dominate the banking industry.
Either outcome is likely to lead to much higher stock prices for these little bank stocks.
Investors should focus on sound banks that are trading ...
