I'm Betting I Can Make a Nifty Profit From This Beaten-Down Thrift

Few businesses seem duller than savings-and-loan companies, which generally are known as thrifts. Many of them trade as bond substitutes due to their relatively high yields. Paying out a large percentage of net earnings typically indicates a lack of good reinvestment opportunities. Then there is Axos Financial , a Las Vegas-based thrift founded in 1999. It pays no cash distributions. Instead, it has plowed back all profits into growth of its basic business. That strategy has worked amazingly well for Axos. Looking at Axos' results from June 30, 2013, the end of its fiscal 2013, through this year's estimated June 30, 2023, numbers, all its major business metrics have boomed. If analyst expectations are on target, mortgage loans, savings deposits, earnings per share and book value will have all surged from 460% to 600%. Continuous shareholders must be pleased as well. Through Dec. 26, 2022, they had pocketed more than 447% in exactly 10 years. Those who were amenable to trading based on valuation could have done much better as evidenced by the data below. Since 2011, three severe selloffs have taken place, followed by four major recoveries. The average gain on those rebounds was a stunning 381.5%. Holding periods were long enough to qualify for long-term capital gains treatment but short enough to avoid traders' boredom. From the numbers alone, you would think volatile tech stock. Even the name Axos gives me that vibe. Axos Financial is a certified left to right growth stock. Every single year since 2012 established new record EPS. The current fiscal year appears likely to continue that streak with nearly 20% year-over-year EPS growth expected. The company's balance sheet is good. There is no defined benefit pension plan and no preferred shares. AX's volatility is quite remarkable considering how predictably it has flourished. Amazingly, as of last Monday's quote of $37.48, the stock traded at 17% below where it was at 2018's peak. EPS in fiscal 2018 came in at $2.37. The current year is projected to finish with about $4.60 in EPS, almost double what it earned five years earlier. By all normal standards Axos should be selling for a growth stock multiple. Instead, it closed last week at around 8.1x this year's estimate. What is AX worth? Previous should have sold moments (red-starred) reflected valuations ranging from 17.5x to 27.7x earnings Prior best entry points (green-starred) ranged from an absurd Covid-panic nadir of 4.8x to 16.9x earnings in 2014. The stock's 10-year average price-to-earnings (P/E) multiple is 12.7x. Simply reverting to a historically typical multiple easily could send AX back up to north of $58 within eight months or so. That is not far-fetched. Axos changed hands above $61 during both calendar 2021 and 2022. Fundamentals have only gotten better. Research from Morningstar is in full agreement. Its computer-generated present-day fair value estimate for AX sits at $48.52. That makes it a 4-star, out of 5, BUY. Any decline to below $36.65 would elevate its rating to that coveted 5-star territory. Fast Graphs research service used a period longer than 10 years to set AX's normal P/E as 12.4x or so. Reaching that more conservative P/E would still send Axos to about $56.44 by next July. Yahoo Finance joins the club by calling Axos Financial undervalued. Its 12-month goal price of $48.67 seems very low, though, as it assumes a forward P/E of just 9.7x by this time next year. That is well below normal and even further discounted to where AX has traded when the public was more enthused with the shares. None of the goal prices should be treated as upper limits. As noted earlier, the stock ventured much higher than it average P/E on many occasions. Options on AX are available as far out as January 2024 and 2025. The data below reflect after-hours quotes on the Jan. 2024 strike price puts at from $37.50 to $42.50. The data also show the bid-ask spreads on AX's Jan. 2025 calls at from $35 to $50 strikes. I rarely buy options. Going long the LEAP calls out to 2025 might provide a spectacular return on investment if AX does what I think it could. Shorting puts appears to be a nice way to garner decent gains if AX merely stays level, goes up or even if it declines slightly. These options only trade sporadically, so be sure to use limit orders only, placed near the midpoints of the spreads. It is hard to imagine a more favorable risk-reward than what Axos now presents. Buy some shares, sell some naked puts, buy some speculative calls or consider doing all three. The next large upturn seems overdue. In January, once tax-loss selling abates, the move could be quite sharp and very substantial.

I'm Betting I Can Make a Nifty Profit From This Beaten-Down Thrift

This undervalued savings and loan doesn't pay a dividend but has rewarded shareholders with big returns over the years and looks primed to do so again.

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