Interesting Ideas From an Activist Fund

 | Feb 19, 2013 | 5:00 PM EST
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Over the weekend, I spent quite a bit of time digging through a pile of stock of reports and one 13HF filing really stood out. I have interviewed and discussed the folks at PL Capital several times in the past year. The firm engages in bank stock investing with an activist twist and has produced some stellar results. For 2012, its fund was up more than 40% because the portfolio of primarily small regional and community banks paid off for the firm. Since its inception, the fund has better than doubled the overall market return with its unique approach to bank stock investing.

From its 13F filing, I cannot spy out their buying and selling activity, but I can spot its largest positions and highlight some of its focus areas. The firm has a decently sized stake in some of the larger banks as its members apparently believe they are cheap at current levels. They also have stakes in the 2018 warrants for Comerica (CMA), Capital One (COF)and PNC Financial (PNC). I like the warrants especially on market declines, as this not only give you a bet on banks for the next five years, but these will also appreciate if volatility should pick up substantially. PL Capital also has outright positions in the big banks, including Citigroup (C), JPMorgan (JPM), Bank of America (BAC) and Wells Fargo (WFC).

One of the fund's largest positions is Intervest Bancshares (IBCA), a New York based bank with a strong presence in Florida. Although the bank's address is listed as Rockefeller Center, it only has one branch in New York and six in Florida. Trading at about 50% of book value, the stock is cheap, but the bank is not without some issues. It is in arrears on some of their debt payments and has not made its TARP dividend payments since February of 2010. The company has seen its capital position improve and the equity-to-asset ratio is now slightly more than 15. Nonperforming assets have improved from their worst levels and still make up more than 4% of total assets. This bank has some fleas and some risks -- but if it works out in the long run, the shares could offer a substantial return.

The firm also has a stake in shares of BankFinancial (BFIN), an Illinois-based community bank with offices in Cook, DuPage, Lake and Will Counties and a little over 1.4 billion in assets. The bank's equity-to-assets ratio is just below 10 and nonperforming assets have fallen dramatically -- to less than 3%. The company has been reworking and disposing of problem assets and has brought the nonperforming assets ratio down from above 6 in the past year. The stock trades at a slight discount to tangible book value and is a decent purchase in a market pullback.

The firm still has a sizable position in HF Financial (HFFC)as well. PL Capital won board seats at the Midwestern Bank is still a substantial owner of the shares. The bank is based in South Dakota and does business in Minnesota as well. The loan portfolio is solid as a rock, with nonperforming assets at just 1.4% of the total asset base. The company has a strong presence in agricultural lending with more than 11% of the loan portfolio invested in the strong farm loan sector. The portfolio has 30% invested in  commercial real estate in the comparatively strong upper Midwest market. The equity-to-asset ratio has improved, year-over-year, but at 7.79% of the total, it is still lower than I normally like to see. The shares currently trade at just about tangible book value. I like this Midwestern bank and there are two activists invested in the stock with a commitment to driving the value and price of the bank higher. I think you could buy some shares right now and try to add during a market decline sometime later this year.

I was pleased to note that its portfolio contains many of my trade of the decade names. Among the banks large enough to discuss, the funds owns Key Corp (KEY) and TF Financial (TCB), which are two long-term holdings of mine. We also had shared ownership in about a half dozen smaller banks that appear safe and cheap.

Most of the fund's holdings are very small community banks. Investors with an interest in the "trade of the decade" should spend some time going through this filing, line-by-line, in search of investable Pick.

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