BofI: Peter Lynch-style Buy

02/05/2014 7:00 am EST


John Reese

Founder and CEO, And Validea Capital Management

To select stocks, John Reese assesses the criteria of legendary investors; in his Validea newsletter, he highlights a Peter Lynch-style banking buy.

BofI Holding, Inc. (BOFI) is a newcomer to the Validea Hot List; the stock gets high scores from my Peter Lynch- and Motley Fool-based models, as well as my Momentum Investor approach.

BofI—short for "Bank of Internet"—is the holding company for BofI Federal Bank, a diversified nationwide bank that provides financing for single and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables.

Though it has just one location—in San Diego—its Internet business allows it to have approximately $3.3 billion in assets, and approximately 40,000 retail deposit and loan customers across all 50 states.

Below, we assess the stock based on my Peter Lynch approach, which would consider BOFI a "fast-grower."

Using this approach, the investor should examine the P/E (25.72) relative to the growth rate (30.90%), based on the average of the three, four, and five-year historical eps growth rates, for a company.

This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for BOFI (0.83) makes it favorable.

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that, in many cases, can continue many more years.

This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for BOFI is 30.9%, based on the average of the three, four, and five-year historical eps growth rates, which is acceptable.

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. BOFI's Equity/Assets ratio (9.00%) is healthy and above the minimum 5% this methodology looks for, thus passing the criterion.

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. BOFI's ROA (1.47%) is above the minimum 1% that this methodology looks for, thus passing the criterion.

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