In this article I use AAII’s A+ Investor Stock Grades to provide insight into three bank stocks. With the Federal Reserve initiating its first interest rate cut in years, should you consider the three stocks of FFBW (FFBW), Guaranty Bancshares (GNTY) and Pathward Financial (CASH)?
Bank Stocks Recent News
The Federal Reserve’s decision to lower interest rates in September and again in November reflect a shift from fighting inflation to encouraging economic growth. Banks are particularly well-positioned to capitalize on the interest rate cut. Lower interest rates are expected to spur loan demand, especially in mortgages, auto loans and business lending, where reduced borrowing costs will attract new borrowers.
At the same time, the U.S. banking sector reported impressive third-quarter 2024 earnings, with major banks like Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo & Co. (WFC) exceeding analysts’ expectations. JPMorgan Chase reported an increase in net interest income to $23.5 billion, beating analysts’ forecast of $22.7 billion. This strength, combined with improving consumer sentiment, potentially indicates sustained loan growth and profitability for banks in the coming quarters.
Grading Bank Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three bank stocks—FFBW, Guaranty Bancshares and Pathward Financial—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Bank Stocks
What the A+ Stock Grades Reveal
FFBW (FFBW) operates as the holding company for First Federal Bank of Wisconsin that provides banking products and services in the U.S. It offers deposit accounts, including noninterest- and interest-bearing checking accounts, money market accounts, statement savings accounts, and health savings accounts (HSAs), as well as certificates of deposit (CDs). The company also provides various loans, which include one- to four-family owner-occupied and investor-owned residential real estate, multifamily residential real estate, commercial real estate, commercial and industrial, and commercial development loans, as well as consumer loans, such as home equity lines of credit (HELOCs), new and used automobile loans, boat loans, recreational vehicle loans, and loans secured by CDs. FFBW was founded in 1922 and is based in Brookfield, Wisconsin.
The company has a Value Grade of C, based on its Value Score of 52, which is average. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda).
FFBW has a shareholder yield of 8.2%, which ranks in the 7th percentile among all U.S.-listed stocks. Additionally, its price-to-book ratio is 0.79, which ranks in the 23rd percentile and is below the sector median of 1.10. These favorable ratios suggest that FFBW’s stock may be relatively cheap compared to similar companies in its sector.
FFBW has a Momentum Grade of C, based on its Momentum Score of 51. This means that the stock’s momentum is average in terms of its weighted relative price strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%. The ranks are 59, 47, 79 and 28, sequentially from the most recent quarter. The weighted four-quarter relative price strength is –3.2%.
The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. FFBW has a Growth Grade of A, which is very strong. The company ranks in the 100th percentile with its five-year annualized sales growth rate of 6.5%.
Guaranty Bancshares (GNTY) operates as the bank holding company for Guaranty Bank & Trust N.A., which provides a range of commercial and consumer banking products and services for small and medium-sized businesses, professionals and individuals. The company offers checking and savings, money market, and business accounts, as well as CDs. It offers consumer loans and commercial and industrial, construction and development, one- to four-family residential, commercial real estate, farmland, agricultural and multifamily residential loans. It also provides trustee, custodial and escrow, investment management, retirement plan, automated teller machine (ATM), night depository, direct deposit, and cashier’s check services. Other services include: online and mobile banking services; debit cards; letters of credit. Treasury management services include wire transfer, positive pay, remote deposit capture and automated clearing house services. Guaranty Bancshares was founded in 1913 and is headquartered in Addison, Texas.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades from 1998 through 2019.
The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
Guaranty Bancshares has a Quality Grade of C, with a score of 41, which is average. The company ranks strongly in terms of its change in total liabilities to assets and buyback yield. Guaranty Bancshares has a change in total liabilities to assets of –5.0% and a buyback yield of 1.6%. This is partially offset by its –0.4% accruals-to-assets ratio, ranking in the 21st percentile of all stocks.
Guaranty Bancshares has a Value Grade of B, based on a score of 62, which is a good value. The company ranks in the 17th percentile for shareholder yield and in the 35th percentile for its price-earnings ratio. The company has a shareholder yield of 4.4% and a price-earnings ratio of 14.1. A lower price-to-free-cash-flow ratio is considered better value, and Guaranty Bancshares’s price-to-free-cash-flow ratio is 16.9. The price-to-book ratio is 1.26, which translates to a rank of 41.
The company has a Momentum Grade of C, based on its Momentum Score of 49. This means that the stock’s momentum is average in terms of its weighted relative price strength over the last four quarters. The ranks are 57, 69, 42 and 41 sequentially from the most recent quarter. The weighted four-quarter relative price strength is –3.8%.
Pathward Financial Inc. (CASH) is a financial holding company. The company’s subsidiary is Pathward N.A., which operates through three segments: consumer, commercial and corporate services/other. The consumer segment encompasses the banking-as-a-service business line, which partners with various entities to address payment and lending needs, offering prepaid cards, deposit accounts, payment processing and consumer lending. It provides a range of installment and revolving consumer lending products through its credit solutions. The commercial segment delivers products through working capital, equipment finance, structured finance and insurance premium finance lending solutions. The corporate services/other segment covers shared services and treasury-related functions, including the investment portfolio, warehouse finance, wholesale deposit and borrowings.
Pathward Financial has a Quality Grade of C, based on a score of 45, which is average. The company ranks strongly in terms of its buyback yield and F-Score. Its buyback yield of 4.7% ranks in the 92nd percentile among all U.S.-listed stocks, and its F-Score of 5 ranks in the 52nd percentile. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. Pathward Financial also has a return on assets of 2.2%, ranking in the 59th percentile.
The company’s Growth Grade is B, which is strong. Pathward Financial has generated positive annual cash from operations in four out of the past five fiscal years and has a five-year annualized sales growth rate of 10.6%.
Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. Pathward Financial has an Earnings Estimate Revisions Grade of B, based on a score of 61, which is positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Pathward Financial reported a negative earnings surprise of 4.3% for its fiscal fourth-quarter 2024 ended in September. However, in the prior quarter it reported a positive earnings surprise of 7.1%. Over the last month, the consensus earnings estimate for its fiscal first-quarter 2025 ending in March has decreased from $1.253 to $1.217 per share, due to one upward and one downward revision. Over the last month, the consensus earnings estimate for fiscal-year 2025 ending in September has increased from $7.107 to $7.300 per share, based on two upward revisions and one downward revision.
__
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
If you want an edge throughout this market volatility, become an AAII member.