Since US financials were hammered in 2009, we have been actively adding them to the portfolio. In our system at Contra the Heard, when a sector is badly wounded, that indicates opportunity. Here are some companies that tweaked our interest enough to plunk down our dollars.
One is a major known throughout the world, Bank of America (BAC-NYSE). The timing of our purchase last August at $6.76 was “interesting” to say the least, as it was the day before Warren Buffett made known that he was also in. His move certainly made a big splash and made us feel more confident that the risk was more muted than the marketplace generally assessed.
BAC has returned to profitability. In the most recent quarter, the outfit earned $2.5 billion. That compares with a loss of $8.8 billion a year ago. Long-term debt was knocked down by $53 billion and the Tier 1 Common Capital Ratio hit a record of 11.24%. Provision for credit losses were lower than at any point since Q1 2007. Though the turnaround process has seemed long, given the size of this behemoth, it has been done in a fairly expeditious fashion under the direction of CEO/President Brian Moynihan. However, it remains anything but complete and there are definitely miles to go before our Initial Sell Target of better than $30 is reached.
A key to Moynihan’s approach has been to quickly deal with issues. One that has recently been almost finished – some parties are disputing the settlement – is the $738 million in compensation for credit card price fixing. This will not help the bottom line in the short term, but there is a point where these issues have to be concluded. Allowing them to drag on not only takes time, but is costly in terms of both employees and litigation.
BAC is integral to the global marketplace. If it ever goes down, there will be more than heck to pay throughout the financial system.
A much smaller acquisition was Bank of Commerce Holdings (BOCH-Nasdaq). This California based enterprise remained profitable on an annual basis throughout the recession. It also earned $1.9 million in the first quarter this year, a 31% increase from a year ago. Given that the share count is only 16.5 million, that clicks in at earnings of 13 cents per share. Not bad at all, and the sort of figure that suggests the stock might be undervalued at the current level. Loan loss provisions dropped to $1.3 million, less than half of one year ago, while non-performing assets also continued to shrink. The book value, even after stripping out goodwill, is better than five bucks. And yes, the dividend yield of around 3% remains available to be collected, while the economy improves.
Perhaps the main negative in many investors’ minds is the fact that the float is about twice as big as a few years ago. That’s not a boon to shareholders, but in absolute terms, the total remains quite small. Through the end of last year, insiders were soaking up shares. That stopped abruptly until May, when one of them decided to step back into the market. Alas, his colleagues did not join him, and insider ownership hovers about 6%.
BOCH remains a light trader, averaging fewer than 8,000 per day over the last three months. No one has posted a message about it on the Yahoo Message Board since January. Evidently, the company does not have much of a following. At this point, it is difficult to imagine what catalyst(s) will push the stock price back into double-digit territory. That said, this bambino is a nice little holding that exemplifies the manner in which a bank should operate. It was purchased at $4.01 and the initial sell target is $11.49.
Sun Bancorp (SNBC-Nasdaq) has had three consecutive years of red ink to its discredit. After consistently making money for more than a decade – often between $10 and $20 million a year – Sun Bancorp lost $17 million in 2009, $185 million in 2010 and $67.5 million in 2011. Talk about stumbling into a minefield! Banking and insurance companies are prone to these mega-blowouts, wherein losses over a relatively short period will offset the sum of a dozen or more positive years. Though the scale of the Great Recession obviously sets it apart, the Third World debt bomb in the early 1980s and the savings-and-loan debacle of the late ’80s and early ’90s also illustrate this point.
Two of the most recent quarterly numbers indicate that the company’s position is improving. In Q3 of 2011, the company actually made money, and in Q4 the company lost only $1.5 million. Alas, the first quarter of this year was not pretty, as the loss registered $28.1 million. Still, insiders led by investor extraordinaire Wilbur Ross continue to believe as they own not only more than 54 percent of the company, they are not moving to sell. Sun Bancorp was purchased at $3.90 and the Initial Sell Target is $9.00.
One other that was purchased was VIST Financial at $5.24. That was recently taken over in a stock transaction by Tompkins Financial (TMP-NYSE). That premium from the Contra purchase worked out to better than 125 percent. Tompkins is now being held as further appreciation is anticipated.
Our expectations are that the financial sector will continue to move smartly upward. There remain many excellent investments in this sector for both the short and long haul.
Benj Gallander will make a newsletter presentation on “How Contra has Achieved 15.3 Annualized Returns Over the Past 15 Years” on Saturday, Sept. 22, during the Chicago Hard Assets Investment Conference.