Hudson City Bancorp (CAPS pick and analysis)
February 7, 2011 § 4 Comments
This is also a study in: when checklists don’t work. Bum bum buuuuuuh.
So I’ve spent some time figuring out my personal checklist in order to minimize losses and hopefully teach myself some patience, wisdom and prudence. And I really like my checklist. Even just having it down on paper and being able to reference it has been a great learning experience (and has made me go “what was I thinking!” on a bunch of old positions I had.)
But there are times when a checklist breaks down. And for me, that is currently with an industry I like moving forward: small bank stocks. I’ll admit, I don’t know how to properly read bank balance sheets in order to see if they are super risky or just ok. For these reasons alone I am staying away from Citi and BOA and JP Morgan and all of the other big investment banks. They don’t have a great management track record to say the least; they don’t seem to care about making their business sustainable. Heck, they wouldn’t throw water on a burning puppy if it meant a few cents off their EPS.
But there are banks out there I do like, and I think it is an industry that is going to do really well in the future. Small banks. Narrowly focussed banks. Banks that don’t do much more than take on deposits, loan out money, do mortgages and so on (you know, things I can understand) as opposed to taking your money, hiding some toxic assets in it, calling it a Colateralized Debt Obligation and selling it to some poor schmucks, or groups of schmucks, or worse yet, pension plans (read: old people) and taking them for a ride.
One of the banks I’m looking at (and will be adding to CAPS) is a bank that has been getting tanked recently and is near their 52-week low (which is usually a trigger for me to look into them.)
But like I said: my checklist doesn’t accommodate banks. Banks don’t have inventories. You can’t really do a NCAV or a NNWC screen on em. I don’t even know if calculating their CROIC even means what I think it means!
But let’s look at reasons why I do like em:
1. CROIC (if it even works) is sitting around 7%. Not great. But when I do a DCF using 80% of CROIC as the growth rate, I get a value of about $20/share. It’s sitting at $11.17.
2. P/E of around 10 confirms the potential cheapness of it
3. Management is awesome. They didn’t go for all the craziness of the housing boom. They in fact shunned the “cheap” growth they could have got by altering their underwriting standards. That means they didn’t take on NINJA loans (No Income No Job or Assets). They hoarded cash during the boom and managed to keep their dividend secure during the crisis. That to me is stunning.
4. The dividend. 5.5% with a payout ratio at around 50%. That payout ratio is high, but I am confident management can hold it together.
5. Have an above 6 in Piotroski Score (but I’m unsure if that is helpful for banks)
6. Look to be growing, and are in a sector I like.
7. Probably aren’t evil.
Reasons I don’t like them:
1. I don’t know the industry all that well, and definitely not well enough to spot problems before they are baked into the price
2. Dividend cut could happen
3. Are in a competitive industry and when big banks recover, they could dilute the potency of the small banks.
4. The margin of safety may not be high enough. The Graham Intrinsic Value Discount has a pretty thin margin of safety, while the DCF is just under 50%.
All that being said, I put the intrinsic value of the bank around $20. Add in to that the 5.5% divided and I will probably buy it if it goes south of $11 again. Heck, the good management alone is enough for me to want in. I’m cool with paying a fair price for a stellar company. But since this bank looks a little (not a lot) cheap, plus that dividend as an added margin of safety…well.
Hit up your thoughts in the comments.