When we think of financial stocks, the ones that usually come to my mind are the large-cap stocks like Citigroup (C), Goldman Sachs (GS) and Bank of America (BAC), After all, those are the ones that get all the chatter on the financial networks and dominate the headlines of the papers and magazines.
I have avoided most of these too-big-to-fail institutions since the credit crisis, partly for what I consider moral hazard reason and in part because it is still almost impossible to interpret their balance sheets.
I have a pretty good pencil, but there are still too many moving parts and derivatives for me to feel comfortable with these giants even if smart guys like Bruce Berkowitz and Warren Buffett like them. I am by no means opposed to coat tailing smart investors, but the stock have to pass my tests as well, and the financial giants just don’t.
However, when we look at some of the smaller financials it’s a little easier to get a handle on things. When we get down to just deposits, loans and investments with smaller banks or premiums collected, as well as reserves and loss ratios among the insurance companies, I can get a lot more comfortable with the balance sheet and actual asset value of the companies. Among the smaller financials, I can find well-run institutions that are still a bargain and should strong long-term returns.
United Fire Group (UFCS)
United Fire Group (UFCS) is a pretty basic company. It sells property and casualty and life insurance and does a pretty good job of it. The property and casualty unit had to deal with what CEO Randy Ramlo called “Storms, storms and more storms” in the second quarter, but UFCS is still having a strong year.
In spite of the difficult second quarter, the company has been seeing strong growth for the past five years and is poised to continue that run going forward. UFCS stock is off most people’s radar screen and trades at just 90% of book value. United Fire has paid a dividend every quarter since 1968, and the current yield is 2.8%. Management has also been buying back stock and repurchased 201,516 at an average share price of $27.63 in the second quarter.
HomeTrust Bancshares (HTBI)
I don’t have to have a degree in advanced physics and financial engineering to understand HomeTrust Bancshares (HTBI), either. The company is a North Carolina bank that is looking to expand via acquisition into market in the neighboring states of Virginia and Tennessee and have done a good job of buying whole banks and branches at good prices so far.
HomeTrust has doubled assets since 2008 and now has $2.7 billion in total assets. HTBI has done a solid job of improving the loan portfolio, and nonperforming assets have dropped by almost half in the past two years. The stock is still cheap at just 85% of tangible book value and has the potential to be a huge winner for patient investors.
[Note: Both of these stocks trade at low volumes. If you choose to invest, protect your investment with limit orders and stop-losses.]
Bottom Line
Leave the complex derivative and footnote filled reports from the big financials to others investors. You can find plenty of value among the smaller, straightforward, easy-to-understand institutions.
As of this writing, Tim Melvin was long HTBI.
