This Mid-Cap Stock Is Surprising the Market

Today I’d like to introduce you to an attractive mid-cap stock from the banking sector that’s surprising the market with consistently stronger financial performance. But first, I want to tell you how I screen for stocks… 

Sometimes analysts and investors are so paralyzed by a complex or negative corporate scenario, that they lose focus on where the company is subsequently heading. Within the fog of uncertainty, a percentage of those companies will invariably head in a good direction. 

We saw this phenomenon after the July 2015 merger between Kraft Foods Group (KRFT) and privately owned H.J. Heinz was completed, forming a new company, Kraft Heinz Company (KHC). After many months of sideways trading, my stock analysis told me that KHC was ready to break out of its trading range, so I added the stock to the Growth & Income Portfolio in Cabot Undervalued Stocks Advisor on April 5, 2016.

KHC proceeded to launch upwards in a few short weeks. 

Applied Materials (AMAT), Vertex Pharmaceuticals (VRTX) and Dollar Tree (DLTR) are three more examples of stocks that went through significant changes in the last year—a failed merger, a transition from net losses to profitability and a big corporate merger—leaving investors behind the eight ball—not knowing what might happen next. 

What do all of these famous companies have in common? They each passed my stock screening process with flying colors, telling me that the companies are about to experience several years of strong earnings growth, and that the stock market has not yet recognized their value. 

My area of expertise in global investment markets focuses on identifying S&P 500 stocks that meet both growth and value criteria: strong future earnings growth and comparably low price/earnings ratios (P/Es). 

There are currently 23 S&P 500 stocks that meet my stock selection criteria. These are cream-of-the-crop stocks that should please most growth stock investors and most value stock investors. Most of these attractive stocks are concentrated in just a few industry groups, most notably homebuilders, building materials, banks, technology and travel. 

This Mid-Cap Stock Offers Growth and Value Now 

Zions Bancorporation (ZION) is a bank holding company that owns eight commercial banks with about $60 billion in assets and almost 500 branches in 10 states throughout the western U.S. The company is based in Salt Lake City, Utah.

Zions is growing revenue, net income, credit quality and loans in 2016. Here are the details. 

• Strong Second-Quarter 2016 Results 

In July, the company reported strong second-quarter EPS of 44 cents (December year-end), when analysts were expecting 41 cents. Loan growth exceeded Wall Street’s expectations in the quarter—up 2.7% vs. last quarter, and up 5.7% vs. a year ago—which led to higher net interest margin and higher net interest income. In fact, this was Zions’ strongest loan growth since the third quarter of 2008. In addition, expenses and loan loss provisions were much lower than expected. 

Upon the earnings announcement, Zions also increased its quarterly dividend by 33%—from six cents to eight cents per share—and announced that it will begin repurchasing stock, including $45 million of stock in the third quarter. The new dividend yield is 1.2% and the ex-dividend date is August 16.

Zions has a 10.0% capital ratio vs. the 8.5% median capital ratio of 30 mid- and large-cap banks, according to a Morgan Stanley research report dated August 1, 2016. The bank’s cost of funds is the fifth lowest in a ranking of 40 banks, and about half the median cost of the entire peer group. 

• Growing Full-Year Earnings Trends 

EPS fell from $1.71 in 2014 to $1.20 in 2015 due to the sale of the company’s remaining portfolio of its collateralized debt obligation (CDO) securities, and a corresponding one-time pretax loss of approximately $137 million. 

Zions is now barreling through a multi-year aggressive growth phase, with consensus EPS expected to grow 50.8% and 21.5% in 2016 and 2017 (December year-end). Morgan Stanley additionally expects 2018 EPS to grow 29%. As a matter of fact, Zions is set to achieve its highest EPS since 2007 this year. 

The P/Es have not caught up to the earnings growth prospects, making this mid-cap stock extremely undervalued. Right now, the 2016 and 2017 P/Es are 15.4 and 12.7, quite low within the stock’s normal range of 14 to 20. In fact, the P/E has reached 19 or higher every year from 2010 through 2015. 

Institutions own 91% of ZION shares; a bullish sign of professional confidence in the stock. 

• Share Price Overdue for Run-Up 

ZION has been trading sideways for three years—climbing up to the 30 to 32 range and falling back down—and is way overdue for a sustained run-up. You have not missed your chance to benefit from the company’s growing successes. 

More recently, ZION went through a very orderly correction when the month of June brought us a downturn in the S&P 500, immediately followed by the Brexit event. The price chart shows a double bottom chart pattern in June and July, which is a very constructive pattern that typically precedes an upturn. The stock promptly followed through with a rebound toward 29. 

ZION is a high-beta (volatile), mid-cap stock with plenty of growth. I would certainly buy shares at the current price, and anticipate good capital gains in 2016 and beyond. Strong Buy. 

For further updates on ZION and additional investing advice, consider trying our new advisory, Cabot Undervalued Stocks Advisor. With 29% gain in an electronic equipment stock, 24% gain in a construction stock and a 27% gain in a healthcare stock, we’re confident that our other stocks will give us similar gains. Give our advisory a try for 60 days risk-free. 

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