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2 “Strong Sell” Banking Stocks with Massive Downside Potential

Diamond Hill Capital recently released its Q1 2020 Investor Letter, a copy of which you can download below. The Diamond Hill Small Cap Fund posted a return of -36.17% for the quarter, underperforming its benchmark, the Russell 2000 Index which returned -30.61% in the same quarter. You should check out Diamond Hill Capital's top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash. There weren’t a lot of funds who could deliver these kinds of returns without shorting the market or using aggressive put options.

In the said letter, Diamond Hill Capital spoke about Sterling Bancorp (NYSE:STL) and Bank OZK (NASDAQ:OZK) stocks. Sterling Bancorp and Bank OZK are regional banks. Year-to-date, Sterling Bancorp (NYSE:STL) stock lost 40.8% and on June 1st it had a closing price of $12.58. Year-to-date, Bank OZK (NASDAQ:OZK) stock lost 23.3% and on June 1st it had a closing price of $23.02. Here is what Diamond Hill Capital said:

"Shares of Sterling Bancorp, a New York-based regional bank, and Bank OZK, an Arkansas-based regional bank, underperformed amid an evolving rate outlook, a deteriorating economy, and investor concern over potential future credit losses."

In Q4 2019, the number of bullish hedge fund positions on Sterling Bancorp (NYSE:STL) stock increased by about 20% from the previous quarter (see the chart here), so a number of other hedge fund managers don't seem to agree with STL’s downside potential.

In Q4 2019, the number of bullish hedge fund positions on Bank OZK (NASDAQ:OZK) stock increased by about 19% from the previous quarter (see the chart here), so a number of other hedge fund managers don't seem to agree with OZK’s downside potential.

Our calculations showed that Sterling Bancorp (NYSE:STL) and Bank OZK (NASDAQ:OZK) aren't among the 30 most popular stocks among hedge funds.

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