Over the weekend, I had a chance to talk with some folks about Friday's column in bargain growth. The point was made that even though I had talked banks and bank stocks all week, I shouldn't leave them out of the growth discussion.
Finding a financial company that grow book value at an above-average pace is a great way to identify stocks with the potential for huge long-term gains. Finding growth financial trading at a bargain price is a value investors dream. With that in mind I sat down and ran a screen for financial companies that had grown book value at more than 10% over the past five years and traded below book value.
It is not a long list of stocks by any stretch of the imagination. There are just 26 U.S. stocks that make the list. Only eight of them are larger than $100 million in total market capitalization. In today's world, most growing companies have been identified and rewarded with higher multiples, making bargains a very rare find.
My first observation is that the smaller companies on the list are almost all community banks. Fourteen of the 26 stocks are community banks that have recovered very nicely from the credit crisis and are seeing decent book value growth. Many are helping their cause by repurchasing stock at discount to book value. All of them have to be considered serious takeover candidates in today's banking world where grow or die is the rule. Larger banks struggling to grow are going to find adding their assets and loan portfolio to their bank too tempting to refuse. If you are not investing in this space you need to look yourself in the mirror and ask, "why not?"
The largest cheap growing financial is AIG (AIG). The company continues to remake itself in the wake of the credit crisis and announced its latest restructuring plan back in January. There is pressure on the board as activists John Paulson and Carl Icahn have combined to gain a seat on the board and are pushing for a three-way split of the company. F
For their part, management has said that their plan will allow them to return at least $25 billion to shareholders by year end 2017 through cost cutting and reorganization. Previous moves have allowed AIG to grow its book value at a high rate and the stock is trading at just 70% of book value. If management does not meet its targets in 2017 many observers think that the activists will turn up the heat and try to force a breakup of AIG.
Nelnet (NNI) is an interesting company, to say the least. Student loans are a controversial topic these days and this company finds itself right in the thick of the fray. Nelnet has four divisions right now. The student loan and guaranty servicing segment is involved in loan servicing activities. The tuition payment processing and campus commerce segment offers products and services to help students and families to manage the payment of education costs at all levels and grades. The asset generation and management segment engages in the acquisition, management and ownership of the company's student loan assets. The telecommunications division offers internet, television and other high-speed telecommunications services to its customer base.
One of these doesn't fit and I think that's what has investors a little skeptical of the stock. It purchased Allo Communications at the end of 2015. The company is a Nebraska-based telecommunications company that provides a pure, end-to-end fiberoptic network that focuses on underserved markets. I am not sure how this fits with the core business, but Nelnet has a history of investing cash flow form the student loan business outside core operations. It owns a stake in HUDL, a software company whose product allows teams to quickly upload, review and study game and practice videos. It is used by 44,000 football teams, 36,000 basketball teams, 9,000 soccer teams and 7,000 volleyball teams at all levels. It also partnered with real estate companies to invest in retail, multi-family, office and industrial developments, primarily in the Midwest.
It unusual, but it seems to be working. Nelnet has grown book value by about 20% annually since 2004. Book value has grown by 18% a year over the last five years. In spite of that, the stock is trading for just 91% of book value and less than 7x earnings.
While there are only a handful of financial companies that have strong book value growth trading below book value, most of the ones I do find are worth consideration and investigation by long-term aggressive investors.