Last week I went through the Value Line section on thrifts and wrote down some notes and thoughts I have on the industry. Thrifts and small community banks have had a rough few years, but many have survived and repositioned themselves to prosper going forward. Many of them have cleaned up their balance sheets. Many of the bad loans that were written in 2005-2007 were 5-7 year balloons. Time will help heal these banks.
More importantly, the residential real estate market is doing extremely well, and is the healthiest its been since 2005 with sales increasing and inventory stabilizing.
I thought I’d post a few thoughts I have on the thrift industry, along with four stocks that I added to my watchlist. The four stocks all look cheap, all have certain problems, but may turn out to be interesting investment candidates.
A Few Notes on the Thrift Industry
- Ultra low interest rates are a problem because shrinking asset yields are negating any loan growth that comes from new loans and/or refinancing.
- Thrifts have had it tough, but thrifts will benefit if either:
- Economy picks up, (i.e. long term bond yields will rise) or
- Fed raises rates (possibly because economy picks up)
- Basically, if the spreads widen between short and long term interest rates, that will be a good thing
- Rate hikes are usually bad for lenders, but it might increase spreads, and indicate a better economy
- Thrifts are currently using M&A to increase profits
- Many of the stocks offer good yields but watch the payout ratios
- Book value is important when analyzing thrifts
- Margins for thrifts have been squeezed, and the consensus is that that will continue. Note: that probably means it’s already priced in. What if rates rise?
4 Thrifts I Like
Here are the four thrifts I like. I don’t any positions at the moment, but will be doing some further research. I included the charts of the Price to Tangible Book Value over the past 10 years. Mean reversion is a very important concept, but I like to see charts like this where these ratios are at a 10 year low (or close to it).
- New CEO, old one had too many acquisitions that bogged down the company.
- Near 10 year low of $8.00
- Book is $14
- Stock typically has sold near or above book (mean reversion matters)
- Peter Lynch liked equity/assets of 10% or more, FNFG has 13%, historical is 15-20%
- Dividend was cut last year by 50%, but current yield still 3.7%
- Assets grown 10-fold via M&A
AF-Astoria Financial Group
- Insiders own 21% of the stock
- Stock price 9.41
- Book 13.15
- Sold for 20-30 from 2002-2007 (mean reversion matters)
- Pays special dividends (yield has been close to double digits for a few years after factoring in special dividends)
- Conservative Kansas Thrift
- Very lowly leveraged, conservative bank with an above average equity to assets ratio
NYCB-New York Community Bancorp
- Irving Kahn long time favorite (has 8% of his capital in it)
- 7.1% dividend; many are expecting a cut, but it still would likely be a solid dividend payer even post-cut
- 1.1% ROA, 8.9% ROE
- 1.1 P/B
- Strong equity to assets ratio of 12%
I like FNFG the best of the group, but any of these could turn out to be good investments. I don’t think these will be barn burners, but I think these prices represent a built in margin of safety, and as I mentioned after watching the Steven Romick interview, “Good things happen to cheap stocks”.
As I mentioned at the beginning of the post, residential real estate is a big factor behind these thrifts. Most of the stocks in the industry live and die by housing. The good news is housing is healthy. It is supported by a low supply of new inventory, low interest rates, and an improving economy. Affordability remains high for first time home buyers and buying a home with a 30 year fixed rate under 4% is almost a no-brainer when comparing it to renting. Home builders are becoming more active, but for the past few years new construction housing starts dropped significantly, leading to a multiyear low in inventory. There is also a dearth of available lots for builders to build on, which will put an added constraint on new inventory until new land gets developed and new lots come online. (As a side note, home builder stocks like HOV, DHI, LEN, and PHM have been on a tear in the past 12 months).
Housing also moves in slow, glacial like cycles. I don’t like to think much in terms of top down analysis, but in this case, I do think that housing will be a tailwind for much of the banking world, but especially small thrifts and community banks.
Disclosure: John Huber has no position in any of the stocks mentioned