Yesterday I talked about buying growth stocks at value prices using a few simple metrics. While it is never a long list, you can usually find a few companies that are growing book value at a decent rate trading for less than book value. I have always used book value growth as my measure of value, as everything on the income statement can be manipulated (legally) and engineered to suit management's purpose. At the end of the day, if your company is performing well, the total net worth of the firm should rise in value. I think it is the best measure of true growth.
Yesterday I looked at some energy-related companies that had excellent five and one-year book value growth. Today I want to look at the other sector that dominated the current list of cheap growth stocks. As credit conditions have improved, financial stocks have done a great job of growing their asset value form the distressed levels of five years ago.
Symetra Financial (SYA) has done a solid job of recovering from the messy conditions of the post-crisis era. Business has been good for the provider of employee benefits, life insurance and annuities. Earnings have grown by about 15% over the past five years, and the profits have been successfully reinvested in the business as book value has also grown by 15%. It has been able to maintain the growth rate, as last year's book value growth was a tick higher, at 16%.
CEO Tom Marra likes what he sees for 2015 as well. He recently said on the earnings call: "We remain confident that we will deliver a year of solid earnings, despite some volatility in investment income in the first quarter. Core profitability metrics, base interest spreads, underwriting results and operating margins remain strong, and we are successfully expanding annuity and life insurance account values and premium revenue." Priced at 80% of book value, the stocks is trading at bargain levels right now.
Bond insurer MBIA (MBI) was pretty much left for dead back in the financial crisis. However, years of a strong recovery effort have resurrected the firm to a degree, and MBIA is back in the game. The recent earnings report said that the firm now "returns its emphasis to value creation following a period where value conservation was its primary goal" and is now looking to gain new business and grow its value. It appears to be working, as five-year average book value growth is 11% and last year book value surged higher by 19%. The stock appears cheap at 40% of book value, and management have been taking advantage of the bargain prices in the past year. In the fourth quarter they bought back 1.2 million of the common shares at an average price of $9.44 per share and through the end of February had repurchased 6.3 million common shares at an average price of $8.70 per share.
I bought my first shares of Arbor Realty (ABR) back in the mess that was 2009 and have added to my stake on a few occasions. The real estate specialty finance company invests in multifamily and commercial real estate-related bridge and mezzanine loans, as well as making preferred and common equity investment in real estate projects. I have not sold a share, and if they keep performing as well as they have I may never sell any. The firm has grown book value by 12% a year on average over the past five years, and the one-year growth rate was 17%. The shares trade at about 80% of book value and as a bonus the bargain-priced issued yields 7.48%. Arbor just raised their payout as it increased the shareholder payout by 15.4% following a strong first quarter.
The largest group by far on the list small community banks across the United Sates. Those experiencing the highest growth rate are way too small to mention on RealMoney, but it is worth your time to sit down and search for high-growth small banks. I talk a lot about the merger and acquisition wave in smaller banks, but it is also worth noting that as credit conditions have improved and the economy and real estate markets slowly improve, the small banks that are not taken over will be growth engines for decades into the future. Those little banks that have strong balnce sheets and solid loan portfolios that can dominate their local markets will be as big a source of profits as those that get taken over at premiums to the current price.
The question is not growth or value. It is, where can I find growth at a value price? Using book value growth as the measurement and seeking to buy at discounts to asset value can help you answer the question with profitable results.