These 3 Stocks Offer 23%-50% Upside Potential

On Wednesday, Federal Reserve Chair Jerome Powell hinted that the U.S. central bank would cut rates during its July FOMC meeting.

In testimony before the U.S. House Financial Services Committee, Powell said the central bank would take “appropriate” actions to sustain economic expansion and suggested a “muted” outlook for inflation in the months ahead.

Following the statement, banking stocks retreated as concerns about lending revenue weighed on the broader industry.

U.S. Treasury yields also fell sharply, with the 10-year bond dropping to 2.06%.

Additionally, ongoing macroeconomic concerns tied to trade complement existing worries about the European banking sector.

Earlier this week, Deutsche Bank (NYSE: DB) began laying off 18,000 employees (about 20% of its workforce) with plans to depart the global equities business.

Despite these headwinds, the banking sector looks very healthy.

Also, banks provide a critical service in virtually any type of market: access to capital.

As earnings season approaches, look beyond the big names like Bank of America Corp. (NYSE: BAC), Goldman Sachs Group Inc. (NYSE: GS), and Morgan Stanley (NYSE: MS).

Instead, search for smaller, regional banks that have less exposure to global contagion and stronger dividends than their “too big to fail” competition.

At Money Morning, the best way we know to tap into profitable regional banking stocks that are about to take off is with our proprietary Money Morning Stock VQScore™.

This ranking system tracks 1,500 of the profitable companies in the world and assigns each a score from 1 to 4.

The higher the ranking, the more likely the stock is poised to shoot to the moon.

Here are the three best regional bank stocks to buy before earnings season.

Bank Stocks to Buy No. 3
The first regional bank to buy before earnings season is Keycorp (NYSE: KEY). As Cleveland’s only major bank, Keycorp is the 28th largest firm of its kind in the United States.

Compared to its industry peers, the stock trades at a significant discount in several key metrics.

First, the stock trades at a price/earnings ratio of 10.46, which is less than half the industry average of 21.38, according to Reuters. Shares also trade at a price-to-book value of 1.25, a considerable discount to the average peer figure of 3.32.

Another key metric to focus on right now is its price-to-cash-flow, which sits at just 8.51. That is nearly 60% lower than the industry average of 18.61 and a potential signal that Keycorp could hike its dividend to attract new investors.

The firm currently pays a steady dividend of $0.17 per quarter, representing a yield of 3.86%. As investors turn toward dividend stocks due to falling rates, Keycorp has the availability to increase its yield thanks to stronger operating profits and ensuing cash flows.

And most importantly, KEY has a VQScore of 4.75, signaling that it’s a “Strong Buy” now. This means that the stock is on the verge of a breakout in this earnings season because earnings per share is rising and demand for its underlying shares is growing.

KEY has a potential upside of $22 per share. That price target represents 23% upside from Thursday’s closing price.

Bank Stocks to Buy No. 2
The next banking stock to buy is Valley National Bancorp (NASDAQ: VLY). The New Jersey–based regional bank holds approximately $32 billion in assets, more than $25 billion in loans, $24.9 billion in deposits, and more than 200 branches in three states.

The firm recently made a splash with the purchase of Oritani Financial Corp. (NASDAQ: ORIT) – a firm with 26 offices, $3.5 billion in loans, and $4.1 billion in assets.

Consolidation across the banking space will continue as institutions look to compete for depositors and bolster their balance sheets.

The purchase of Oritani gives Valley a robust presence in New Jersey, New York, Florida, and Alabama – all highly competitive markets.

Wall Street has quietly loved the purchase, and there is plenty of room for this stock to run.

VLY also has 4.75 VQScore, meaning that right now is the time to buy.

Valley National has a dividend of 4.1% and upside above its 52-week high to $14 per share.

That figure represents potential upside of 30% from Thursday’s closing price.

Bank Stocks to Buy No. 1
Finally, we turn to the 50th state’s largest and oldest financial institution.

Founded in 1858 (long before statehood), First Hawaiian Inc. (NASDAQ: FHB) is our top breakout bank ahead of earnings season, according to the VQScore.

The company operates branches, provides wealth management services, and engages in a variety of other banking services to customers in Hawaii (57 branches), Guam (three branches) and Saipan (two branches in the Northern Mariana Islands).

Like many other community and regional banks, investors can find value in shares of FHB.

The company’s price-to-book value sits at 1.32, more than half the discount to the industry average.

Additionally, the company trades at a solid price to cash flow of 10.7, which is the upper average of 18.18.

As earnings approach on July 25, FHB is looking like a strong contender to bolster its dividend and extend its existing stock buyback program.

Yet again, we’ve found another regional bank stock with a 4.75 VQScore, signaling the company is poised to break out as earnings season begins.

Shares have pulled back nearly 13% over the last 12 months, making FHB a solid rebound candidate heading into earnings season.

The firm pays a safe, secure dividend of 4.12% and can easily climb to $38 per share.

This figure represents 50% upside from Thursday’s closing price.

— Money Morning Staff

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Source: Money Morning