More importantly, the residential real estate market is doing extremely well, and is the healthiest its been since 2005 with sales increasing and inventory stabilizing.
I thought I'd post a few thoughts I have on the thrift industry, along with four stocks that I added to my watch list. The four stocks all look cheap, all have certain problems but may turn out to be interesting investment candidates.
A Few Notes on the Thrift Industry
- Ultra low interest rates are a problem because shrinking asset yields are negating any loan growth that comes from new loans and/or refinancing.
- Thrifts have had it tough, but thrifts will benefit if either:
- Fed raises rates (possibly because economy picks up)
- Basically, if the spreads widen between short and long term interest rates, that will be a good thing
- Rate hikes are usually bad for lenders, but it might increase spreads, and indicate a better economy
- Thrifts are currently using M&A to increase profits
- Many of the stocks offer good yields but watch the payout ratios
- Book value is important when analyzing thrifts
Four Thrifts I Like:Here are the four thrifts I like. I don't any positions at the moment, but will be doing some further research. I included the charts of the Price to Tangible Book Value over the past 10 years. Mean reversion is a very important concept, but I like to see charts like this where these ratios are at a 10 year low (or close to it).
FNFG- First Niagara
FNFG data by GuruFocus.com
New CEO, old one had too many acquisitions that bogged down the company.Near 10 year low of $8.00Book is $14Stock typically has sold near or above book (mean reversion matters)Peter Lynch liked equity/assets of 10% or more, FNFG has 13%, historical is 15-20%Dividend was cut last year by 50%, but current yield still 3.7%Assets grown 10-fold via M&AAF-Astoria Financial Group
AF data by GuruFocus.comInsiders own 21% of the stockStock price 9.41Book 13.15Sold for 20-30 from 2002-2007 (mean reversion matters)[/list]CFFN- Capitol Federal
CFFN data by GuruFocus.comPays special dividends (yield has been close to double digits for a few years after factoring in special dividends)Conservative Kansas ThriftVery lowly leveraged, conservative bank with an above average equity to assets ratioNYCB- New York Community Bancorp
NYCB data by GuruFocus.comIrving Kahn long time favorite (has 8% of his capital in it)7.1% dividend; many are expecting a cut, but it still would likely be a solid dividend payer even post-cut1.1% ROA, 8.9% ROE1.1 P/BStrong equity to assets ratio of 12%[/list]I like FNFG the best of the group, but any of these could turn out to be good investments. I don't think these will be barn burners, but I think these prices represent a built in margin of safety, and as I mentioned after watching the Steven Romick interview, "Good things happen to cheap stocks".
As I mentioned at the beginning of the post, residential real estate is a big factor behind these thrifts. Most of the stocks in the industry live and die by housing. The good news is housing is healthy. It is supported by a low supply of new inventory, low interest rates, and an improving economy. Affordability remains high for first time home buyers and buying a home with a 30 year fixed rate under 4% is almost a no-brainer when comparing it to renting. Home builders are becoming more active, but for the past few years new construction housing starts dropped significantly, leading to a multiyear low in inventory. There is also a dearth of available lots for builders to build on, which will put an added constraint on new inventory until new land gets developed and new lots come online. (As a side note, home builder stocks like HOV, DHI, LEN, and PHM have been on a tear in the past 12 months).
Housing also moves in slow, glacial like cycles. I don't like to think much in terms of top down analysis, but in this case, I do think that housing will be a tailwind for much of the banking world, but especially small thrifts and community banks.
Disclosure: John Huber has no position in any of the stocks mentioned.