JPMorgan (JPM) has broken out to new highs this week, but sits near a perilous technical level, writ...
Best Bets in Banking
09/08/2014 10:00 am EST
Smaller regional banks have been getting picked off recently so Doug Hughes, editor of Bank Newsletter, shares a case-by-case analysis of some of these banks and highlights his outlook for the banking sector as a whole.
Steven Halpern: Our guest today is Doug Hughes; a leading expert in community and regional bank stocks and editor of Bank Newsletter. How are you doing, Doug?
Doug Hughes: Good. How are you today, Steve?
Steven Halpern: Very good. Thanks for joining us. First, could you tell our listeners about your overall outlook for the banking sector?
Doug Hughes: It’s on a case-by-case basis. The smaller community regional banks keep getting picked off. We had two more deals last month with (NBTF)—NBT Bank in Ohio—getting taken out at a 50% premium and (IBCA) headquartered in New York City at a 15% premium; so, I think we’ll just see more of the same. Small deals keep happening and the larger banks, some struggling and some doing okay.
With that said, like JP Morgan (JPM) today, it’s within a point of a yearly high. It started quietly moving up, and then some other regional banks don’t move at all; so it’s really a case-by-case basis.
Steven Halpern: Okay. So, what are some of the factors that you are looking at when you want to determine if an individual stock is attractive to you?
Doug Hughes: Just, basically, looking at the market share that they currently have. Are they in a growing market? Is the stock trading under book value? What’s the earnings power of this franchise in the next several years? A lot of banks are struggling here with no growth, so it’s very selective.
Steven Halpern: Now, one bank that you like is First Financial Corp., which has the ticker symbol (THFF). That’s an Indiana-based bank. Could you tell us a little about this idea?
Doug Hughes: Sure. It’s a solid bank, been around for 100 years. They keep picking off small banks that are failing. Although that seems to be running out and they haven’t done a stock buyback in a very long time, but they just announced one last week.
I think the deals, like I said, have dried up for them, so the bank will aggressively buy stock back here when it’s around 30, 31, 32 and—with the buyback—it pushes it back up to around 33 here; but at that valuation it’s very compelling. Also, they are a possible target themselves one day.
Steven Halpern: You also suggested two Virginia based banks. One is C&F Financial with the symbol (CFFI) and the other is First West Virginia Bank Corp. with the symbol (FWV). What’s the attraction for those two?
Doug Hughes: CFFI, the same thing. They just picked off a bank that was going out of business and, basically, they also just announced a 5% stock buyback.
The bank also is trading actually a couple dollars under book, although today it’s bounced back up to around book. Phenomenal franchise—about the best earnings power of any bank in the current market—probably earn over 440 a share this year with the stock at 35.
You can do the math. Makes it a very cheap stock on PE. Insiders own a ton, there have only been three presidents there in 90 years. A very, very well run bank. Just, basically, a little downside and 100% upside on a takeout.
As far as First West Virginia, FWV, the president died there last year in December. The original guy that ran the bank is back in there; no new president’s been named so, basically, that bank is for sale it looks like.
It’s trading only a dollar over book, so usually they fetch about $1, $1.50 per share in dollar terms over book. We’re looking for $28 in a takeout and it’s trading at $21.
Steven Halpern: Now, interestingly, you also like a stock in the financial services sector, and that’s the investment banking firm Oppenheimer Holdings with the symbol (OPY). Could you share your thoughts on that idea?
Doug Hughes: Sure. This one I could talk about all day long. With the market at an all-time high, as Goldman Sachs (GS) hit a new yearly high today; Oppenheimer, for some reason, the stock’s in the middle of the range, pays a solid 2% plus cash dividend.
The deal after deal here in this market for the foreseeable future with rates at, basically, 0%, this is great for their business. There are new stock offerings every week, great for their business.
Their money management business is at an all-time high. The deal book is at an all-time high; could probably earn $3 to $4 a share next year, the stock’s at 24. Again, you can do the math. The book value on this one though is 38 going up several dollars a year.
There are very few investment banks left. There’s Morgan Stanley (MS), obviously. There’s JP Morgan. There’s Goldman Sachs. There are a few big firms like that; but Oppenheimer is a very small firm, only $330 million in market cap, $90 million in assets.
Some foreign company or some US company is going to buy them with a regulatory environment it’s just—there’s too much cost there.
They can earn $6 if they were taken out and knocked all the fat out of this company; although it is running very leanly as it is. Basically, quite under book with tremendous earnings power. The stock trades all day long. You can get a good position in it.
Insiders own 30%. There’s only a float of around 9 million and about a public float of 13.5 with the insiders, so it is a little bit thinly traded compared to, say, a Goldman Sachs, but all day long this stock is worth double in their current market. It’s very hard to find something safe with no downside with that kind of upside.
Steven Halpern: Again, our guest is Doug Hughes, editor of the top-performing Bank Newsletter. Thank you so much for joining us, today.
Doug Hughes: Thank you, Steve. Have a great day.
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