Axos Financial Shares Got AX'd on Banking Fears, and Now It's a Buy

Note: Paul Price's columns will return soon. Shares of Las Vegas-based Axos Financial has been unjustly sold off due to the bank crisis of March 2023. Mid-cap banks came under great scrutiny due to fears of depositors pulling out uninsured deposits, causing a bank run. Axos was already in good shape to weather that storm, but took immediate action to alleviate any doubt about that. It arranged for private insurance protecting depositors' money up to $150 million. That is like what most brokerage firms do for account holders that have assets over the $500,000 Securities Investor Protection Corporation limits. Lloyds of London is a major player in that type of coverage. You must wonder why other banks are not doing the same thing as AX to assuage depositors' fears. That allowed Axos to post commercial deposit growth of 12% in March while other mid-sized players were losing deposits. The firm's 10-year growth record is quite impressive. From fiscal 2013 through fiscal 2023, which ends June 30, Axos Financial posted extraordinary numbers as illustrated below. Continuous shareholders have done well, but the recent pullback from an all-time high of $62.40 during November of 2021 left the gains well below what would have been expected based on value created. That leaves AX set up for a sizable catch-up move higher as traders realize how healthy the firm remains. Volatile (beta = 1.25) AX shares are great trading vehicles for those who like to take advantage of sharp, relatively short-term moves. Over the most recent decade AX averaged about 12.7-times forward earnings. Peak valuations (red-starred below) weighed in at much higher than typical multiples. Exclude the Covid-panic low and AX rarely traded as cheaply as it does right now (green-starred moments). From $36.64 and only 7.5 trailing earnings, there is significance upside potential. A simply regression-to-the-mean valuation suggests AX could rebound to about $62 over the coming 10-months or so. That target price is not far-fetched. AX topped out between $61 and $62 during both 2021 and 2022 on lesser fundamentals that are now in place. Research house Morningstar calls AX a 4-star, out of five, buy. It calls present-day, as opposed to year-ahead fair value as $50.74/ share. That implies a 38.5% upside potential simply reverting to what it is already worth. Guru Focus is on very much the same page regarding Axos Financial. It sees $50.55 as today's fair value. Its 38% upside projection for AX is almost identical to Morningstar's. Option premiums on AX are extremely generous due to queasy feelings about the banking industry at present. That makes for juicy premium if you are willing to sell. Naked put sales on AX appear especially tempting, even on somewhat conservative strike prices. Actual pricing on Axos' Oct. 18, 2024 expiration date $40 and $45 puts are shown below, reflecting AX at $36.64. Worst-case forced purchase prices dropped to either $31.20 or $33.20. I would love to own more AX shares at either of those levels. Sophisticated option traders could do well by setting up the following $40 buy/write combination out to Oct. of 2024. Net cash out of pocket dropped to just $2014 per each 100-share commitment if executed in a margin-type account. If AX merely rises by 9.2% from the trade inception price and holds at that level through expiration day the following best-case scenario will play out. That best-case scenario morphs any gain of 9.2% or greater into a 66.6% annualized profit. What if AX somehow fails to move at all? In that case the following events would unfold. A completely unchanged share price would still deliver a gain if AX held above $30.07 on expiration day. AX has not changed hands below $33.10 since the very dark days of 2020. If AX closes near the $40 mark, but not above it, substantial gains would still be in order with a break-even price of $30.07 and a then doubled position size. Value Line rate Axos Financials' earnings predictability in the top 1% of all 1,700 stocks covered in their main research universe. Buy some AX shares, short some naked LEAP puts or consider setting up a buy/write combination out to Oct. of 2024 or January 2025.

Axos Financial Shares Got AX'd on Banking Fears, and Now It's a Buy

Let me show you how to you can use options to profit off this premier growth company at a mundane valuation.

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