Follow Smaller Activists for Bigger Profits

by Tim Melvin | October 24, 2013 6:00 am

The largest activist investors have been making a lot of noise in the markets lately. Bill Ackman grabbed headlines thanks to his high-profile stumbles in JCPenney (JCP[1]) and controversial short of Herbalife (HLF[2]).

Carl Icahn had the other side of the Herbalife trade and has also made big-time moves in Dell (DELL[3]), Apple (AAPL[4]) and Netflix (NFLX[5]) over the past few months. And Daniel Loeb of Third Point Partners just revealed a large stake in Nokia (NOK[6]) this week.

Many investors try to piggyback these well-known “smart money” investors, but it can be difficult since the price of their chosen stocks moves on the news of their involvement most of the time.

As a result, most of use would be better served following activists who do not make splashy headlines but do boast a long history of making money — such as those focused on community banks stocks.

This is a much smaller segment of activist investing, as the size of the target institutions pretty much keeps the big money out.

The players in this space are pretty closed-mouthed and only reveal their positions when the SEC forces them to do so via a 13D or 13G filing. Fortunately for us, not many are paying attention to small banks so there is time to jump on their coattails and profit from their activism.

One small activist investor to follow is Lawrence Seidman. He has been investing in small banks for decades now. Since the early 1990s, Seidman has been involved in around 35 activist situations … and more than 20 of those banks have since been taken over or merged into a large institution at a higher price.

The former SEC attorney has also been on the board of several of his small bank targets.

I have done very well following him into small bank stocks over the years — and you could too. In fact, Seidman has just become fairly active again, filing his first 13D filings in many months recently.

2 Small Bank Stocks to Buy Now

To start, Seidman disclosed a position[7] in Fox Chase Bancorp (FXCB[8]), located in Hatboro, Pa. The bank is trading right around book value and has been a holding of mine for some time now. Me. Seidman owns a little over 5% of the bank.

In his filing, Seidman said he was buying FXCB because the shares “when purchased, were undervalued and represented an attractive investment opportunity.” However, he also warned the board that he had engaged in proxy fights and sought board seats in the past … and reserved the right to do so once again.

Fox Chase Bancorp has an attractive branch network and solid balance sheet, so it would make an attractive target for larger bank wanting to expand in the region … and is also an attractive target for your money.

Mr. Seidman also announced an increased stake[9] in OBA Financial (OBAF[10]) in Germantown, Md. He now owns a little over 8% of the six-branch bank and has publicly called for the sale OBAF. He was pretty blunt about his assessment of the bank in a letter to the board, which read:

“I see no possibility that OBAF’s operational metrics will significantly improve in the foreseeable future. By my estimate, OBAF’s cost of capital is in the range of 8% – 11%; and, under the most favorable of circumstances, I see no way for OBAF’s return on average equity to meet even the lower end of that range over the next few years.  Therefore, I believe the upside for the OBAF shares is quite limited without a sale to a strategic buyer.”

The stock trades right at book value and a sale at a premium is possible since the banks’ branch network is the District of Columbia suburbs — a very attractive market for many regional banks.

The bottom line is that the big activists who dominate the media make for good stories … but following the quiet, smaller activists can make for good profits.

As of this writing, Tim Melvin was long FXCB.

  1. JCP:
  2. HLF:
  3. DELL:
  4. AAPL:
  5. NFLX:
  6. NOK:
  7. disclosed a position:
  8. FXCB:
  9. announced an increased stake:
  10. OBAF:

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