Sometimes stocks can be downright frustrating when the bull case is, on the face of it, so much stronger than the bear case. In an era where there is almost universal protest about valuation, I demand that you take a look at First Horizon (FHN) , the Memphis-based bank run by Bryan Jordan that can now be presented as the poster boy of wrongly valued securities.
If you don't know First Horizon, you simply aren't looking hard enough at the financials. Right now there is this bizarre dichotomy where most banks, especially the regional banks, are valued -- as if they are no-growth entities withering on the vine. If you contrast them with financial technology companies like Mastercard (MA) , Visa (V) , Square (SQ) or Paypal (PYPL) or even companies like FleetCor Technologies (FLT) and Fair Isaac (FICO) , you will see that the market simply has no taste for a well-run 3% yielder that happens to be in the fastest-growing regions in this country.
There is almost nothing that First Horizon seems to do that warrants anyone of size, any big institution, to pay more for it despite how it keeps improving.
Forget this is a bank. Consider it a utility. It's got 22% compound growth over five years. In that time, it has doubled its dividend. It has a countercyclical book of business that has very little economic sensitivity to the yield curve. It has low loan losses. Its net interest margin did not go down when the Fed cut rates, a total rarity, because they saw it coming.
Jordan has the hottest banking market in the country -- Memphis -- in a state that is growing, one of the biggest beneficiaries of the change in the tax law that gave you a nice SALT deduction, something that New York and New Jersey thrived on. Now he is taking over Iberia Bank -- ostensibly a merger of equals, but there is no question that he, as the CEO, will be running an undermanaged bank in another high-growth area, Louisiana with some Texas exposure. He has also bought some divested Suntrust-BB&T (STI) bank branches in Virginia, North Carolina and Georgia.
That gives him one of the greatest footprints in the country.
Now contrast FHN with American Electric Power (AEP) , the largest transmission network in the United States. AEP has a 6% five-year growth rate. It has a 2.77% yield. It is highly unlikely that it can buy any utility to boost its growth. Its stock is very sensitive to rates and it sells at 23x earnings.
In what world is that right? How is it possible?
The answer is there are anomalies in this market. First, FHN trades with the rest of the accursed regionals in large part because of the ETF-ization of this market, where no one bank can distinguish itself from others.
Second, the market is overly in love with fintech and overly in hate mode with regional banks.
Third, unlike any other industry, regionals get no credit for faster growth than the rest of the cohort. In other words, Bryan Jordan, whom I would argue is one of the top bankers in this country, isn't able to distinguish himself, in the market's eyes, from any other banker.
Can you take advantage of this anomaly? At one point I thought the market would change its stripes. Not anymore. Jordan can't take the bank private. It probably is too big to be bought by any other bank except the majors and they are already too big and have too much concentration in the country to do so.
The only way he can make the bank stand out is to pay a higher dividend, but for that he would have to sacrifice some of the growth that growth buyers demand. It's a conundrum that I have no answer to -- other than to say stop thinking the market's overpriced and start exploring anomalies. There are more First Horizons out there than you think. Just not enough buyers to make a difference.
