by Tim Melvin | May 8, 2014 4:00 pm
As we continue deeper into earnings season, we continue to see companies add or shed billions of dollars of market cap based on a quarterly snapshot of corporate conditions. Along with this, short-term traders are making their large quarterly donations to the market infrastructure by trying to forecast earnings and the market’s reaction to earnings. I have never understood the fascination with short-term results or the mostly futile attempt to trade based on these results. Basing decisions on three-month results is no way to run a business or a stock portfolio.
While everyone else has been frantically trying to guess and trade the earnings of companies like Apple (AAPL), JP Morgan (JPM) and Twitter (TWTR), I have been tracking the earnings of the small regional and community banks, and I like what I am seeing so far. We’re seeing continued credit improvements as bad loans are sold, written off or worked out favorably.
Other real estate owned is shrinking as foreclosed properties are disposed of in a stronger real estate market. Loan demand is still flat, and net interest margins are still low, but most of the banks are creeping along and book values are growing once again. Many of them are buying back stock below book value as well.
Here’s a look at some of the best boring stocks to buy for long-term profits:
Charter Financial (CHFN) is a great example a small bank that is still cheap in spite of improvements in its core business. Earnings were a little flat with profits of $1.5 million, or 7 cents per share, for the quarter ended March 31, 2014. But the credit situation is improving with nonperforming assets not covered by loss sharing agreements at 0.59% of total non-covered assets and the allowance for loan losses at 177% of nonperforming non-covered loans. That compares to 0.91% of total assets and 144% coverage in the prior quarter.
Tangible book value rose from $11.66 to $11.74. The bank also initiated its first buyback program and repurchased 395,246 shares for approximately $4.2 million, or $10.75 per share. Charter also announced another 10% buyback program in April. The stock is currently trading at just 86% of tangible book and yields 1.87% at the current price
Cheviot Financial (CHEV) is another solid little bank that is cheap and showing steady improvements. Cheviot reported net earnings for the first fiscal quarter of 2014 of $815,000, or 12 cents per share at March 31, 2014, up from 11 cents in the year-ago period.
Non-performing loans as a percent of net loans decreased to 1.67% from 2.20% at December 31, 2013. Tangible book value per share was $12.05 up from $11.72 at December 31, 2013. They also repurchased 40,900 shares at an average price of $10.40 per share through the stock buyback program in the quarter. The stock is trading at just 80% of tangible book value and yields 3.4% at today’s price.
The slow, steady improvements in the small bank stocks over the next few years will yield much better profits for investors than all the excitement over short-term earnings. These off-the-radar stocks are the slow and boring way to make money in the markets, while most people are focused on the fast and exciting methods of losing your bankroll.
As of this writing, Tim Melvin was long CHFN and CHEV.
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