Merchants Bancshares Inc (MBVT) – Buy

Banking stocks are down a bit today, including Merchant’s Bank (MBVT), as a result of a Massachusetts court decision against Bank of America (BAC) which voided a couple foreclosure sales the bank made, which violated Massachussetts law.

Banks such as Bank of America were buying and reselling packaged mortgage-backed securities, and because the mortgages got passed around so much, it was difficult to keep track of who actually held the mortgage at any given time and the law in Massachussetts requires that any foreclosure sale be initiated by the party holding the mortgage and when these two particular forclosures happened, apparantly Bank of America didn’t have the right to do it.

Merchant’s Bank is based in Vermont so what happens in Massachussetts doesn’t matter to Merchant’s Bank, unless of course in the long term our state adopt similar laws.

However, Merchant’s Bank never engaged in the risky sub prime mortagage market that banks such as Bank of America did. Merchant’s keeps most of the loans they write and therefore are more carefull and have less problems with foreclosure than most of the large banks.

It is common for a problem with an industry’s largest player to affect the share price of all players in an industry. People hear something bad about the big player they automatically sell any positions they have in any player in the industry.

Combine this along with the fact that Merchant’s Bank’s PE is currently below 10, a dividend well over 4%, and growing earnings makes the stock very attractive today.

Since I already have a large percentage of my investments in Merchant’s Bank I took the opportunity to add more to my position today but with the understanding that this will be a short term trade. I believe that within a short term, the fall in the share price today will be reversed at which time I will sell the shares I purchased today.