I'd Sign Off on Plans to Invest in This Bank

Few companies can match the long-term record of Signature Bank . The past decade saw SBNY's metrics grow exponentially. Earnings per share almost quadrupled. Dividends went from zero to $2.24 annually. Book value surged by 309%. Total assets zoomed 448% higher. Loans on the books expanded by over 727%. Numbers like those would be expected to have pushed the stock up similarly. From $42.21 exactly 10-years ago, SBNY went as high as $164.20 in early 2017. Since then, though, Signature shares dipped down to under $69 last April during the Covid-shutdown. SBNY bounced back to north of $120 by June, only to slide down again. As of Oct. 30, the stock closed at $80.74, not that far from its April dead low. When fundamentals soar, but stock prices lag, the next move is almost a catch-up rally which arbitrages away the discrepancy. Was there recent bad news to explain that sell-off? Nope. In fact, both Value Line and Yahoo Finance analysts see SBNY earning close to $10 per share this year and hitting all-time best EPS in the mid-$11s during 2021. What is SBNY really worth? Since 2010 a typical price-to-earnings has run about 16.9-times. Applying just a 16-times multiple to its 2021 estimate suggests a greater than $100 rise in the share price by Dec. 31, 2021. Add in Signature's now 2.77% current yield and total return potential exceeds 133% within 15-months. My goal is not far-fetched. The data show annual peaks of from $137.90 to $164.20 each year from 2015 right through and including 2020 year-to-date. Record results next year should take SBNY higher than ever before. Yahoo Finance calls SBNY undervalued. They see it reaching over $118 by this time next year, providing almost 50% in total return. Independent research house Morningstar calls Signature's present-day, as opposed to year-ahead- fair value as $98.63, more than 22% about its current quote. They also call SBNY's management exemplary based on its outstanding track record. Longer-term prospects appear even brighter. Value Line see EPS rising to $13.75 not later than 2025, driving the stock to between $175 and $265. The generous annualized returns shown below were calculated from an $83.51 starting point. That implies even higher than indicated return potential from $80.74. Buying SBNY outright appears extremely attractive. Option-minded traders could employ SBNY's $100 strike price, Sep. 17, 2021 expiration date options to set a buy/write combinations. Actual pricing for the $90 and $100 calls and puts, with SBNY at $80.74, are shown below. Buy/writes involve purchase of at least 100-shares while typically selling a covered call and a naked put using the same expiration and strike price. The table below shows the actual cash flow on the three transactions if done in a margin account with enough excess buying power to secure the put sale. That way the money received from the two option sales can help pay for the stock being purchased. If held right through expiration, there are just two possible outcomes. SBNY can either close at $100 or higher, or below $100. If the former possibility plays out, the following best-case scenario will unfold. Any move up of at least 23.9% would deliver an amazing 109.9% cash-on-cash total return over just 321-days. That equals 124.9% annualized. Outright buyers of Signature at $80.74 would need to see it get to about $181 to realize that same gain. If SBNY fails to reach and hold $100 on expiration day the worst-case scenario detailed below would occur. Barring a major decline, though, even that event should be far from scary. You'd end up with a double-sized position and need to pony up more cash to cover the put exercise. That said, your average cost would drop to just $73.38 per share. That's just $4.40 per share (6.4%) above SBNY's absolute panic low price last April. That break-even price is below SBNY's absolute nadirs in each year stretching from 2014 through 2019. Even the worst of those six years gave investors chances to sell for from $133 to over $164. Buy some SBNY shares, sell some puts or consider setting up buy/write combination at either $90 or $100 strikes.

I'd Sign Off on Plans to Invest in This Bank

Signature Bank offers incredible upside, low risk, and a nice yield.

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