I mentioned yesterday that while this is a busy week for markets and news in general, I'm going to keep my head down and check out bank stocks in what CNBC recently named as America's Top States for Business.
Today, let's look at interesting banks in Georgia, which came in eighth place on CNBC's list.
The Peach State has a vibrant economy and has recovered nicely from the credit crunch's messy aftermath. Financial services have boomed in Atlanta, and the state has a strong defense-and-aerospace industry as well.
Agriculture likewise remains strong, with thriving production of soybeans, peanuts, cotton, blueberries and broiler chickens. All told, the state got great scores from CNBC for infrastructure and workforce quality, but the network found that Georgia could do a little better on education and quality of life.
As for banks, Georgia hosts some of the better growth names, like Ameris Bancorp (ABCB) , United Community Bancorp (UCBA) and a bunch of little banks that look vulnerable to takeover offers. But to me, there's really only one Georgia bank to consider: Charter Financial (CHFN) .
Charter has been a favorite pick of mine for some time now, and I'm excited about the bank's future and its current stock price.
Charter is what I call a "bubble bank." Its recent purchase of CBS Financial means that CHFN now has $1.4 billion in total assets, passing the magic $1 billion mark. The firm now also has a total of 19 branches in west-central Georgia, east-central Alabama and the Florida Gulf Coast.
Charter is committed to using both M&A and opportunistic organic growth to expand into the strong Metropolitan Atlanta region. For example, the bank plans to open a new location in Atlanta's upscale Buckhead area later this summer.
CHFN has also done a great job of transforming its loan book from that of a thrift to a commercial bank since the firm completed its conversion from a mutual thrift to a stockholder-owned institution.
For example, the firm has done well increasing commercial exposure. Commercial-real-estate loans currently make up about 40% of CHFN's total portfolio, with residential real estate accounting for about 29%.
Charter has also been on a buyback binge since 2014, purchasing a little more than 35% of its shares outstanding. However, that's going to slow because CHFN shares are currently trading at about 1.05x tangible book value.
CEO Robert Johnson recently told shareholders: "We are pleased with the results of our stock repurchases over the past 10 quarters, but with our stock consistently trading above book value, we intend to focus our efforts on enhancing shareholder value through leveraging our expense structure, improving our noninterest income and realizing the anticipated growth in earnings as a result of our recent and pending Atlanta expansion."
If management can execute its growth plans, Charter should maintain a double-digit rate of book-value growth that will drive the stock price higher. Shares could also trade at a higher multiple if the bank can maintain or grow its current 1x return on assets.
However, we can't rule out Charter catching the eye of a larger bank that wants to expand into the bank's growing, business-friendly region. I think any takeover would have to price the bank at 1.4x book value to succeed. That's around $19 a share vs. CHFN's current price of around $13.
Either outcome -- a buyout or continued organic growth -- should be good news for shareholders. I think you can buy the stock at current levels and add to your stake if the market is kind enough to give us a sell-off.
No Fan of Goldman Sachs' Report
A Goldman Sachs study that crossed my desk earlier this week suggested that low expectations for earnings made buying call options a "high-expectation" trade.
The firm said that buying calls across the board on stocks set to report earnings was profitable in each of the 19 years studied, producing a 14% average return.
If you only read the report's headline, it seemed like easy money: Buy out-of-the-money calls on stocks before earnings season really gets rolling, then rake in the cash once it does.
However, the report ignores the fact that few investors have enough cash to buy calls across the board on the hundreds of companies that will report earnings over the next few weeks. In fact, I think this whole "study" was just the latest missive from professionals who want to sweep as much of your cash into their pockets as possible.
If I ever told my clients such things back when I was a broker, I'd be in jail. My advice: Ignore the earnings-season hype and stick with a solid, long-term strategy.