Against the Crowd: Benj's Best Bank Bets

10/21/2015 10:00 am EST

Focus: FINANCIALS

Benj Gallander

President, Contra the Heard

Benj Gallander looks for stocks that he expects will offer significant appreciation over multiple years. Here, the editor of Contra the Heard, looks at a trio of small-cap US banks and a favorite large-cap play for patient investors willing to go against the crowd.

Steven Halpern:  Joining us today is Benj Gallander, editor of Contra the Heard. How are you doing today, Benj?

Benj Gallander:  I’m doing very well, Steven.  How about yourself?

Steven Halpern:  Very good. Thank you for taking the time today. You’re well known as an expert in value investing and you often go counter to the Wall Street crowd.  Can you tell our listeners a little about your long-term investing strategy?

Benj Gallander:  We’ve been doing this for well over 20 years and we invest in companies that are out of favor.  When companies are beaten down and we feel that they have the chance to return to their previous form—and we look at gains of 100% plus, often 200%, 300%, 400%—that’s when we look to buy.  

Of course, it’s not just based on the past stock price.  We also look at financial ratios, debts, the management, that kind of thing.  It’s very important to us, though that we really feel the company is indeed in a turnaround, and again, we’ve been doing it for a long period.

Steven Halpern:  That type of approach often takes patience because you’re waiting for some change in the company that isn’t yet recognized on Wall Street.

Benj Gallander:  Yes, that is very true indeed.  Our average hold time, last we looked, was about three and a half years.  Some companies we’ve held for over ten years.  I remember Service International and Stewart Enterprise in the funeral sector, but again, both clocked in with huge gains of 300% to 400% and it proved worthwhile, plus they were kind enough to pay us a dividend while we waited.  

Steven Halpern:  Now one area you’ve been particularly bullish on for a while is the American banking sector.  Before we look at any individual names, could you first share your general thoughts on the outlook for financial stocks in the US?

Benj Gallander:  We started buying into financial stocks big time around 2009.  We’ve noticed that every ten years, or so, the banking system mistakes, gets into trouble, and the stocks are badly beaten down.  

One that you and I have talked about before was Fidelity Southern (LION) that we bought for $3.32.  We sold it at 18.74, so it was a gain of 450% plus dividends.  

There are numerous other companies in the sector that we bought and we think if interest rates go up, that will help the banking sector.  It has in the past, so we should see some improvements to the bottom line because interest rates will indeed go up in the United States.

Steven Halpern:  You’re particularly bullish on a trio of small-cap bank stocks. Let’s start with Bank of Commerce Holdings (BOCH), which is based on Redding, California.  What’s the attraction here?

Benj Gallander:  This is a small bank.  One of the nice things was, during the recession, every year it continued to make money.  They pay a dividend of three cents a quarter, plus sometimes they add an additional dividend.  It trades below the book value, which is about $6.50.  

Insiders own almost 6% and they’ve been acquiring more stock.  It’s just a lovely bank, well run, well capitalized, and it wouldn’t surprise if at some point somebody came in with a takeover offer.

Steven Halpern:  Now, you also like Maryland-based First United (FUNC). What do you like in this situation?

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Benj Gallander:  This bank was very special in terms of during the recession, they did not dilute the share counts at all, which many, many banks did. They only have 6 million shares outstanding and change.  It trades way under the book value, which is over $13.  Again, insiders hold about 6.5% and they have been buying.  

The capitalization ratios here are excellent.  Back in the day it had a dividend of almost 20 cents a quarter.  Right now they’re not paying a dividend, but I suspect within the next couple years they will re-establish a dividend,and I imagine after that they will start to grow it.

Steven Halpern:  Now your third small-cap idea, and forgive me if I pronounce this wrong, is Macatawa Bank (MCBC).  Could you share your thoughts on this Michigan-based outfit?

Benj Gallander:  Well, as I mentioned with FUNC, we expect a dividend to recommence there.  It was the same thing with MCBC.  When we bought it, it did not have a dividend.

Then they started to pay a dividend of two cents a quarter.  They just increased it to three cents a quarter.  Back in the day they were paying up to 18 cents a quarter.  

It’s a bank that we think is in a good place.  Michigan, as you know, was very, very badly hit, seems to be recovering.  In this case, insiders own almost 23%. The level right now of delinquencies is at its lowest level in the history of this bank. It has been around for a long time.  

Looking at all three of them, we feel that Bank of Commerce holdings could double.  FUNC I could see going well over $20 and MCBC, I also think, could double.  

Steven Halpern:  Now outside of the small-cap area, you also like Bank of America (BAC).  What’s the story here?  It seems to have quite a different background than the small-cap firms.

Benj Gallander:  Well, we buy both large-cap and small-cap in the Contra to Herd portfolio.  We picked up Bank America in 2011 at $6 and change.  Our feeling was that the bank would survive.  

Also, we liked the management a lot. We thought the dividends would increase and they cut us back as far as a penny a share.  It’s now up to a nickel a share.  

One of the big things was that America is such a litigious country and I think that’s unfortunate for the system.  

It’s the most litigious in the world and governments and individuals and institutions went after the bank, so there were huge legal bills to be paid.  Right now they seem to be getting towards the end of that process.  

They reported results this week—$4 billion in net income—so the stock is actually reacting to that as we speak.  I can see this stock going back over $38, but if you go back to the early 2000s, to the mid 2000s, it traded well over this price at that point in time.  

Steven Halpern:  Again, our guest is Benj Gallander of Contra the Herd. And I’d like to let our listeners know that Benj will be a featured guest at the MoneyShow in Toronto.  Thank you for your time today.

Benj Gallander:  It’s always a pleasure, Steve, and I look forward to the next time.

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