Stock prices (and valuations) across the banking sector have shot up since the election, with investors baking in expectations for valuation-friendly policy changes like lower corporate tax rates and less regulatory burden. Time will tell how many of these expectations become reality, but I think First Community Bancshares' (NASDAQ:FCBC) 35% rally (closer to 45% at the peak) is overdone.
Try as I might, I can't figure out exactly how to get in tune with the growth expectations that investors seem to be baking into the valuation here. I certainly see how a lower tax rate can boost the cash earnings stream, and I can at least understand the argument that potential new policies more favorable to extraction industries like lumber, coal and gas would help a bank with a footprint largely in southwestern Virginia and southeastern West Virginia. All of that said, it seems to me that you have to assume a mid-teens long-run return on equity and use a single-digit discount rate to get to today's value and that seems like an ambitious set of assumptions.
First Community's Valuation Seems To Assume A Lot Of Positive Breaks