Forget The Shutdown: This Bank Stock Has 39% Upside

By (dsgoodboy),

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I love it when a raging bull market pulls back. The steeper the pullback, the more I like it. 

Obviously, this has its limits, but money is made by buying low and selling high in the stock market. Short-term profit-taking in strong individual stocks and mostly bogus economic fears are the aberrations that savvy long-term investors take advantage of to earn consistent profits.

One timely example is the stock market sell-off preceding this month's U.S. government shutdown. Clearly, this was not the first time the federal government had been threatened with a shutdown, and history tells us it will be quickly rectified. This fear is ill founded, yet the market plunged, creating buying opportunities. 

The same thing happens with individual stocks. Even strong stocks exhibiting powerful upward momentum and solid fundamentals pull back due to occasional profit-taking. This selling can occur anytime and often happens without warning. Professional investors wait for these opportunities to snap up stocks at a discount. This buying is what pushes the stock back into the long-term uptrend. 

My basic technical screening looks for strong stocks that have pulled back for one to three days but are still above their upward sloping 200-day simple moving average. This average is what ensures the long-term uptrend is still in place and the stock has strong odds of not continuing to fall. Once shares drop below the 200-day simple moving average, the odds of a bounce back become too risky to buy in most cases. 

While the technical screen will narrow down the universe of stocks to choose from, it is far from the only criteria I use. My "Price Drivers" stock-picking system looks at three components: technical, fundamental and institutional/insider buying. When all components produce a bullish signal, the stock becomes a "strong buy" candidate.

My favorite stock right now fitting all three "Price Drivers" criteria is regional bank Flushing Financial Corp. (Nasdaq: FFIC) . Let's look at each of the three components.

1. Technical
Flushing Financial moved higher since early May before hitting resistance around $20 during the first week of August. Shares pulled back to the 50-day simple moving average and slowly moved higher to the $18.50 range during September. Shares then plunged from the $18.50 area to $17.50, which is what triggered my technical pullback alert. Intraday support was found at $17.50 and the plunge appears to be stabilized. The 200-day simple moving average is in the $16.50 range.

2. Fundamental
The bank posted stellar second-quarter results. Non-performing loans improved by 16% from the previous quarter, marking their lowest level since June 2009, and delinquent loans decreased 12.6%. This improved credit quality, combined with a 50% increase in earnings per share ( EPS ) to $0.33, signals a solid fundamental picture. The company also pays a 2.8% dividend.

3. Institutional/insider buying
My favorite value-oriented fund manager, Mario Gabelli, has been buying shares of Flushing Financial. He recently added 192,000 shares to his portfolio, lifting his total holdings to 756,800 shares. He has been slowly accumulating shares of the regional bank, indicating a strong bullish bias.

Gabelli subscribes to the value philosophy of Warren Buffett combined with the ideas of value-investing pioneers Benjamin Graham and David Dodd. Suffice to say, when Gabelli moves on a stock, it's a strong endorsement for further upside. In addition to Gabelli, hedge funds Bryn Mawr Capital Management and Hutchin Hill Capital also own stakes in FFIC.

Risks to Consider: No matter how many hedge funds are buying or how strong the technical and fundamental pictures are, all stock investing involves risk. Unforeseeable "black swan" events could occur at any time. Always use stops and position size correctly when investing.

Action to Take --> Buying shares now on the pullback with stops right below the 200-day moving average in the $16.50 range makes good sense. My six-month target price is $23.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing , Investing Ideas , Stocks
Referenced Stocks: EPS

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