by Tim Melvin | January 15, 2014 10:22 am
Earnings season is going to burst into full swing this week, especially for financial stocks. Many of the larger bank stocks will be reporting earnings, and traders will be trying to anticipate how bank stocks like Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C) will move as a reaction to the announcements.
This is the height of insanity — it’s simply not possible to do much more that guess what the number will be and how the market will react to it. The odds of getting both right and making money on your prediction work out to be roughly 25% — assuming you’re right half the time for each variable. I don’t like those odds, so I prefer to eschew the prediction game in favor of the reaction trade.
Right now my trusty little stock screener show me that there are 187 U.S. banks stocks trading between 90% and 130% of tangible book value. If a few of the banks can post earnings misses and get sold down to less than 90% of tangible book value, they will attract my attention and become candidates for my Trade of the Decade bank stock portfolio. I have a list of bank stocks that I’ve been watching in hopes that a negative earnings report creates a buying opportunity.
I have owned shares of Capital Bank Financial (CBF) since the company completed the rollup of Bank of Islamorada, Greene Bank and a few other small banks. CBF used private equity money to buy banks at very cheap prices — often with FDIC loan-sharing arrangements — in the aftermath of the credit crisis. CBF will not be shy about buying additional banks when opportunities present themselves.
I backed into CBF stock at a sizable discount through risk arbitrage trades and have done very well, but I would love the chance to buy more shares at a price-to-book ratio of 0.8. Right now the stock trades at 1.2 times book. CBF reports earnings on Jan. 23, and I am hoping for a big miss.
National Bank Holdings Company (NBHC) is another company that was formed specifically to buy banks on the cheap after the credit crisis, and it has been pretty successful so far. NBHC now has 97 branches in Colorado, Missouri and Kansas and has been profitable since it began banking operations. The company also took advantage of FDIC assistance when buying banks on the cheap.
NBHC is actively scouting new acquisitions and plans to grow into a major regional bank in the U.S. The bank shares fetch 1.1 times tangible book value, and I am hoping for miss when NBHC reports earnings on Jan. 28 to create an attractive entry point.
These two banks were created by very smart people with extensive experience in banking and finance to take advantage of the severe dislocations in the banking industry after the real estate and credit crisis. I would love to own more of them at lower prices, and I’m hoping the silliness known as earnings season gives me a chance.
As of this writing, Tim Melvin was long CBF, NBHC.
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