Here's Hoping This Earnings Season Brings Us Bargain-Priced Banks

 | Jan 11, 2017 | 12:00 PM EST
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Once again we find ourselves in the midst of the circus known as earnings season. I have long said that focusing on your guess about how accurate someone else's guess was about a short period of a corporation's life span is a ridiculous way to manage your portfolio. Nonetheless, that's the hot topic of the day, and would-be traders are making their double guess bets even as I type this. The financial media is talking up potential beats and misses, and the professional options traders are getting positively giddy thinking about all the mispriced options they will sell to retail earnings traders over the next few weeks.

It is not that I ignore earnings season. I read the reports for companies that I own, but I rarely act on them. It takes something drastic for me to sell a stock based on a report discussing three months' results. My timeframe is years, not weeks or months, so I evaluate how the company is progressing in a long-term context. The quarterly report is useful, but not necessarily actionable for a deep-value investor.

The other thing I do during earnings season is hope for an earnings disappointment that brings a stock I like into the range where I am comfortable buying shares. This quarter, I will be watching the small regional and community banks very closely, as we may see opportunities develop. The small banks have been bid up since the election on hopes of regulatory relief, but we may see some weakness in the earnings reports that brings some banks back below book value, giving us another chance to be buyers.

When I talked with Chris Marinac, the Head of Research for FIG Partners, at the end of December, he told me, "The fourth quarter's going be a reset because fourth quarter is going to have to mark-to-market on having interest rates go up as much as they have. We've seen 70 basis points, approximately the 10-year increase from the end of September to where we are here in late December. That, unfortunately, is going to create a negative mark-to-market for the available for-sale securities." That may surprise some people who are new to the sector and are expecting sunshine and happiness in the reports, based on regulatory relief and tax cuts that have not happened yet.

I prepared a list of 89 banks this morning that trade between 1x and 1.2x book value. I have it on the desk and have set up price alerts so that if they fall back below book on a disappointing report that leads to profit-taking, I can be ready to act. I am buying based on where I think the stocks will trade in five years, so short-term weakness does not bother me in the least, and I will be a happy buyer if I can get a good price on a good bank. If the shares drop further, I will simply buy more.

Provident Financial Holdings (PROV) is a good example of the type of bank I am hoping to buy on weakness this earnings season. The bank has crossed the $1 billion in assets survival point, and is now looking to grow further. They have 13 branches in the Inland Empire region of California, with a total of $1.2 billion in assets. Nonperforming assets are just 1.16% of total assets, so the loan portfolio is in good shape. The bank raised its dividend by 8% this summer, and they have been buying back stock -- with more than 60,000 shares repurchased in the third quarter. Joseph Stilwell is the largest shareholder, with a 7.5% ownership position, so we have a strong activist keeping an eye on management's performance. The shares trade at 1.17x book value, and if they were to tumble back below book, I would be a big buyer of this bank.

I am hoping we get a selloff that creates an opportunity to get some more cash to work. Marinac has a solid outlook for small banks in 2017. He told me when we talked, "We've seen a lot of stocks go from 90% a book to now 120% and 130% a book, and some that have gone from 120% to 150%. Historically, this group has more to run. That doesn't mean we don't see profit-taking, because I think that would be healthy in the first part of the year, but I think there's room for a price to book to expand. Again, as we just talked about, book value should rise for the year. If we can see the price to book expand, and we could see the book value itself per share expand, it's not a bad thing for the industry."

Tomorrow I will talk about some of the other banks where I am hoping this earnings season pushes back down to bargain prices.

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