Here is a bank that is priced below market averages and is poised to grow with the economy.

HMN Financial is a holding company that own a bank, Home Federal Savings Bank.  The Bank’s operations are in the Iowa, Minnesota and Wisconsin areas.  The Bank focuses on traditional banking in the various areas for its customers.  The stock price is trading at $19.25 and the market capitalization is $193 million.  

I have been extremely bullish on banks for a number of months.  As it turns out the bullishness is warranted.  Many larger banks are seeing their stocks rise.  The same reasons will affect the lesser-known stocks simultaneously.  HMNF is a great example of that.

Published over a year ago
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Reviewed by Vlad Skutelnik

Banks have a great deal of potential to increase in value.  With interest rates heading higher, the revenue stream for banks will improve significantly.  Banks predominant revenue is generated because of interest rates.  At the same time, this bank has been lagging the rest of the market from a valuation perspective.  Adding this stock to your portfolio will prove to be a strong move.  

There are currently many different techniques concerning forecasting the market as a whole as well as predicting future values of individual securities such as HMN Financial. Regardless of method or technology, to accurately forecast the stock market is more a matter of luck rather than a particular technique. Nevertheless, trying to predict the stock market accurately is still an essential part of the overall investment decision process. Using different forecasting techniques and comparing the results might improve your chances of accuracy even though unexpected events may often change the market sentiment and impact your forecasting results.

Predictive Modules for HMN Financial

Sophisticated investors, who have witnessed many market ups and downs, anticipate that the market will even out over time. This tendency of HMN Financial's price to converge to an average value over time is called mean reversion. However, historically, high market prices usually discourage investors that believe in mean reversion to invest, while low prices are viewed as an opportunity to buy.
Please note, it is not enough to conduct a financial or market analysis of a single entity such as HMN Financial. Your research has to be compared to or analyzed against HMN Financial's peers to derive any actionable benefits. When done correctly, HMN Financial's competitive analysis will give you plenty of quantitative and qualitative data to validate your investment decisions or develop an entirely new strategy toward taking a position in HMN Financial.

How important is HMN Financial's Liquidity

HMN Financial financial leverage refers to using borrowed capital as a funding source to finance HMN Financial ongoing operations. It is usually used to expand the firm's asset base and generate returns on borrowed capital. HMN Financial financial leverage is typically calculated by taking the company's all interest-bearing debt and dividing it by total capital. So the higher the debt-to-capital ratio (i.e., financial leverage), the riskier the company. Financial leverage can amplify the potential profits to HMN Financial's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if the firm cannot cover its debt costs. The degree of HMN Financial's financial leverage can be measured in several ways, including by ratios such as the debt-to-equity ratio (total debt / total equity), equity multiplier (total assets / total equity), or the debt ratio (total debt / total assets). Please check the breakdown between HMN Financial's total debt and its cash.

Breaking it down a bit more

HMN Financial is a holding company that own a bank, Home Federal Savings Bank.  The Bank’s operations are in the Iowa, Minnesota and Wisconsin areas.  The Bank focuses on traditional banking in the various areas for its customers.  The stock price is trading at $19.25 and the market capitalization is $193 million.  

I have been extremely bullish on banks for a number of months.  As it turns out the bullishness is warranted.  Many larger banks are seeing their stocks rise.  The same reasons will affect the lesser-known stocks simultaneously.  HMNF is a great example of that.  

A bank earns its money via the differential between the loans it makes, collecting the interest, and the deposit interest it pays.  Given that variable, here is HMNF’s loans and deposit numbers, respectively, over the past several years:

2012:  $454,045  /  $514,951

2013:  $384,615  /  $553,930

2014:  $365,113  /  $496,750

2015:  $463,185  /  $559,387

What you are looking to achieve as a bank is a continual increase in the deposits and loans.  They should go hand-in-hand.  Over the past several years the deposits have been increasing incrementally.  This has been a strong trend.  Likewise, the bank has been able to translate that into increased loans, as a bank should focus on.  This continual increase is vital to what a bank does; it is a bank’s primary revenue stream.  

Also, there is the total interest income and interest expense.  What you are looking for in this listing is the largest possible interest income with the lowest interest expense. So, here are the interest incomes and expenses, respectively, as well as in the final column the earnings-per-share to show how these numbers translate:

2012:  $30,816  /  $7,139  /  $0.88

2013:  $22,983  /  $3,289  /  $6.15

2014:  $20,613  /  $1,211  /  $1.40

2015:  $21,453  /  $1,507  /  $0.69

There was a continual decrease in the interest income with a simultaneous decrease in the expenses, naturally.  The earnings tell a slightly different story with a choppy return.  That is not a bad thing.  in fact, what I prefer is far more stable earnings, something this stock has not been able to provide.  But, that turns out to be a good thing if you are looking to invest in the company.  As it turns out other investors desire the same, easily predictable patterns, which are very difficult to locate in the investing world.  But, because the earnings have been a bit choppy, the stock has been trading on the lower end of possibilities.  Earnings-per-share is coming in, at the last quarter’s numbers, at $1.25 per share.  

The stock is trading just above the 10-times earnings levels that I look for when I am picking a stock.  But, 2016 is expected to come in around $1.50 per share.  That would mean that the market is moving in advance of the number and is up around the $22.50 level at average ratios.  But, the stock market is trading not at the 15-times earnings that are typically average but instead the market is trading above 25-times earnings.  That is a massive ratio that is mostly unsustainable.   However, with a company such as HMNF you would expect to see potential to be a bit higher.

The economy has a lot of potential with growth.  The Federal Reserve is increasing interest rates which directly affects the potential revenue of a bank.  As the economy improves continually so will this bank’s prospects going forward.  Putting this stock into your portfolio will prove to be a long term smart decision.  The stock is underpriced when considering the earnings-per-share.  Also, with the potential of the economy and the revenue stream of banks, considering interest rates heading higher, this sector will see large advances with their stock price.  You will want to take advantage of that and get into HMNF for a long term position. 

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Editorial Staff

This story should be regarded as informational only and should not be considered a solicitation to sell or buy any financial products. Macroaxis does not express any opinion as to the present or future value of any investments referred to in this post. This post may not be reproduced without the consent of Macroaxis LLC. Macroaxis LLC and David Taylor do not own shares of HMN Financial. Please refer to our Terms of Use for any information regarding our disclosure principles.

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