Crypto Fears Bit at Signature Bank, but for No Good Reason

Few banks can match the long-term growth that Signature Bank accomplished over the previous decade. Earnings per share shot up more than 430%, Dividends were initiated during 2018 and recently raised. Book value grew by about 264%. Signature's shares reflected those terrific metrics in January of 2022 when the stock hit a record peak of $374. 80. Since then, though, SBNY apparently lost investors' confidence as it dropped as low as $106.81 earlier this month. At its Jan. 30, 2023 quote of $123.57 cumulative 10-year total return was just 73.5%, a small fraction of the value created over that decade. What happened to cause that sea change in opinion? SBNY was a lender and banker to some crypto-related firms. When FTX declared bankruptcy Wall Street went on a shoot first, ask questions later mode. Banks with exposure to the crypto world were trashed just in case their fortunes were tied to a sinking industry. Some institutions of that ilk were significantly damaged, but others were affected minimally. SBNY immediately assessed its exposure and declared that earnings would not be greatly diminished. They dumped billions of crypto-related deposits and went with alternative sources of funding. Direct exposure to crypto-currencies was estimated at only about 0.1% of 1%. When the first quarter of 2022 results were reported, management's statement were proven to be accurate. December quarterly EPS were the highest ever for SBNY. Full year EPS, at $20.76, also set a record. Quarterly dividends were increased by 25%. Wall Street is a stubborn animal. Many analyst still refuse to believe that SBNY will prosper while cutting back or eliminating crypto exposure further. For that reason there is a wide variance in 2023 EPS estimates from different research houses. I will have more to say on that later. From 2012 through 2022, SBNY sold for an average price-to-earnings of 15.9-times. From 2012 through 2017 its best entry points came with multiples ranging from 14.5-times to 17.1-times (green-starred below). Post-2017 a series of market disruptions like the Christmas Eve Capitulation of 2018, the Covid-panic of 2020 and 2022's overall market sell-off offered some of the cheapest valuations ever for those willing to buy when others were scared. Value Line is among the most bullish services regarding SBNY's 2023 earnings. It sees another record year on tap with EPS growing to $22.90. Applying a still below average 15 P/E to their forward estimate suggests SBNY could hit $343 or so by this time next winter. Yahoo Finance uses the lowest 2023 estimate I could find for SBNY. It sees the bank dipping to just $14.66 in EPS. Even so, Yahoo Finance calls the shares undervalued and looks for almost 22% in year-ahead total return for buyers at the current quote. I disagree with both their estimate and the assumed P/E they base their goal on. Assuming a 10.4-times multiple on a stock which averages 15.9-times seems overly conservative. GuruFocus carries a very precise $232.49 present-day fair value for SBNY. Reverting to that middle of the road target will deliver a solid 88.1% if it takes a full year to occur. Quantitatively-based Fast Graphs says Signature's long-term average price-to-earnings is 20.36-times. That appears too high based on its most recent 11-year track record. Go with a more historically sound 15-times FAST Graph's conservative $15.05 EPS assumption for 2023 and you come up with a $225.75 Dec. 31, 2023 fair value projection. While a tad less than GuruFocus' number, today's buyers could book an 82.5% gain plus dividends on SBNY. Morningstar enigmatically rates SBNY as a 3-star hold. Why is that surprising? They call the stock's present-day fair value at $194.29 per share, greater than 57% above its current price. Morningstar also notes management's exemplary capital allocation while also noting it is not far from above a 5-star, highest, buy rating. Will SBNY post EPS near $15 or closer to $22? Only time will tell. I lean to about a flattish year compared with 2022's record number. Fifteen times $20 would take SBNY back up to $300. Option savvy traders can play SBNY via sales of naked puts out to Dec. 15, 2023. The graphic below shows actual pricing on SBNY's $140 - $150 strike price puts, with the shares at $123.54. Worst-case, forced purchase prices would be $111.50, $113.50 or $115.10 respectively depending on which strike prices was employed. Future stock market action can never be guaranteed. That said, Owning SBNY at near the break-even prices shown would have been a winning position for all but a couple of months over the previous two years. The stock's momentary two-year low of $106 lasted just minutes. That was set when crypto fears were running rampant. Now, with Bitcoin back above $22,500 those fears appear to have been overblown. Buy some SBNY shares, short some naked puts or consider doing both. No matter which research proves most accurate they all agree that Signature Bank is worth well above its Jan. 30, 2023 price. I am rarely put off by low prices on good-quality names. Above is what I put together on SBNY back on Oct. 30, 2020, with the shares at $80.74 on the way to $374.80. The $186.40 price target and EPS estimates for future years back then proved to be significantly too low. SBNY remains among my top dozen dollar holdings.

Crypto Fears Bit at Signature Bank, but for No Good Reason

Now that uncertainty has made this bank name an opportunity. Let me show you how to play it.

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