The media have paid lots of attention recently to second-quarter 13F filings from "rock stars" like Warren Buffett and Carl Icahn, but I find it more valuable to see what smaller bank activists like Joseph Stilwell are doing.
After all, a 2014 Sterne Agee study and my own research have found that community-bank stocks typically enjoy tremendous excess returns after activists take positions in them. Often, the ensuing discussions end up with a bank being sold at premium prices.
In fact, I've made lots of money over my career by cherry-picking stock ideas from bank activists' 13F filings, and Stilwell is one of my favorite such investors to follow. He's been investing in community banks with great success since the early 1990s.
Let's check out what his latest 13F shows:
The big news in Stilwell's latest 13F is that he's accumulating shares in several "mutual holding companies," or MHCs.
These are banks that have taken the first step toward converting to 100% stockholder-owned institutions by selling initial shares to the public even though the MHC retains a majority of the bank's stock. But when the MHC takes a second step and sells the rest of the stock to the public, that often unlocks plenty of value and current shareholders see big gains.
For example, let's assume that an MHC that has 10 million shares -- four million shares outstanding and six million that the MHC hangs on to -- and $100 million of equity. The shares are therefore worth $10 each.
But let's assume the MHC then sells the remaining six million shares for the same $10 apiece. The bank will still have the same number of shares, but about $150 million of equity thanks to the secondary offering's $60 million in proceeds less expenses.
Those who own shares in the MHC that were worth $10 each will find that their stock is now worth more like $15 a share. Buying in advance of this secondary offering has been a winning strategy for me over the years, and apparently Stilwell is a fan of this approach as well.
The three MHCs that he recently bought into are all way too small to mention here on Real Money, where we don't like to focus on stocks with less than $100 million in market capitalization due to their volatility. But you can do a little homework and read Stilwell's 13F yourself to check them out.
I own all three, and I think they have tremendous long-term upside for investors who are willing wait for a second step offering.
A larger bank that Stilwill bought during the second quarter is HopFed Bancorp (HFBC) , which has 18 branches in Kentucky and Tennessee.
Stilwell's fund owns 9.4% of the bank, and the activist sent a letter to shareholders in May that said he "believes our bank's management has been unfaithful to shareholders. In our view, HFBC has broken the most obvious commitment to do right by its owners, paying management fairly for a job well done. Instead, HFBC management performs poorly and the board egregiously overpays them year after year!"
HFBC currently trades for just 87% of book value, so the potential upside is enormous if Stilwell successfully pushes for a sale. After all, the average small bank is selling for around 1.3x book value these days.
HopFed has about $718 million in assets and has been expanding toward the Nashville market, which might make it a tempting target for anyone looking to enter or expand in that region.
The new federal Puerto Rico Oversight, Management and Economic Stability Act has helped clear up the outlook for both banks, and if we see some improvement in the Puerto Rican economy, they could trade closer to book value. That would generous huge returns for those courageous enough to "take the plunge" on the two banks alongside of Stilwell.
The Bottom Line
Tracking Stilwell's 13Fs has paid off big time for me in the past, and it's more than worth your time to check out his current filing. He's been a very successful bank activist and investor over the years, so latching on to his coattails can be very lucrative indeed.