A Financial Investing Aficionado Sours on These Bank Stocks

Regulation repeals taking too long, Bernard Horn says

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Holly LaFon
Jun 08, 2017
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Bernard Horn (Trades, Portfolio)s investments in financial services companies peaked in the past several quarters as a percentage of his stock portfolio, but the widely known head of Polaris Capital Management jettisoned one and decreased three positions in bank stocks in the first quarter.

Horns Polaris Global Value Fund, founded in 1989, fell short of its benchmark MSCI World Index in the first quarter, returning 4.76% versus 6.38%, and outperformed on a one-, five-, 10- and since-inception basis. Polaris managers invest worldwide including in emerging markets using a strategy that combines technology with traditional fundamental research.

While non-U.S. bank holdings advanced in the first quarter, the funds return was tempered by slumping U.S. bank stocks. In a letter, Horn credited their rethinking of the sector to the Trump administrations slowness to make good on its objectives to reduce federal regulation and lower taxes, which did not justify the banks rising valuations. Trump had discussions with bank CEOs in April, telling them he was doing a major elimination of Dodd-Frank regulations.

From the Nov. 8 election to its peak on March 1, the S&P 500 Financials SPDR swung to a 26% increase, and has since pulled back 7.1%, for an overall year-to-date gain of 0.97%. At May 31, the sectors trailing price-earnings ratio was 16.8, compared to 24.08 for the S&P 500, according to S&P Dow Jones Indices. As of June 7, its forward price-earnings ratio was 13.1, down from its highest point since 2010 reached earlier in the year, compared to 17.6 for the index, according to Yardeni.

But congress on Thursday moved to make federal reform law Dodd-Frank a central issue once more with a bill originating in the House financial service committee that would overhaul the Consumer Financial Protection Bureau and repeal certain regulations. Financial stocks rose 1.15% with the S&P 500 flat for the day.

The banks most sensitive to the news were Citigroup (

C, Financial), up 2.4%; Bank of America (BAC, Financial), up 1.8%; JPMorgan (JPM, Financial), up 1.4%; and Wells Fargo (WFC, Financial), up 1.1%.

Including Thursdays gains, Wells Fargo remains down 4.1% and JPMorgan Chase down 1.6% year to date. Bank of America has risen 2.9% and Citigroup 4.7% year to date.

Bernard sold out only of British bank Independent Bank Corp. (

INDB, Financial), of which he owned 93,224 shares. Horn had a 104% gain on the stock, which he first bought in 2011.

Although we consider it one of the best run financial institutions in New England, Independent Banks very high valuation was unsubstantiated on a fundamental basis, his letter said. We reallocated the capital to more attractively-valued portfolio companies.

Horn reduced his positions in the following three U.S. banks:

Brookline Bancorp Inc. (

BRKL, Financial)

Horn reduced his holding of the bank by 40,500 shares or 20%. He has an approximate estimated gain of 37% on the position started in 2012.

Brookline Bancorp Inc. has a market cap of $1.1 billion; its shares were traded around $14.35 with a price-earnings ratio of 19.37 and price-sales ratio of 4.24. The trailing 12-month dividend yield of Brookline Bancorp is 2.50%. The forward dividend yield of Brookline Bancorp is 2.56%. Brookline Bancorp had annual average earnings growth of 9.9% over the past 10 years. GuruFocus rated Brookline Bancorp the business predictability rank of 4.5-star.

Southwest Bancorp Inc. (

OKSB, Financial)

Horn sold 22,700 shares, or 16% of his position in the first quarter. He has an estimated 58% gain on the stock since starting in the first quarter 2011.

Southwest Bancorp has a market cap of $469.98 million; its shares were traded around $25.15 with a price-earnings ratio of 22.7 and price-sales ratio of 4.84. The trailing 12-month dividend yield of Southwest Bancorp is 1.27%. The forward dividend yield of Southwest Bancorp is 1.3%.

JPMorgan Chase & Co. (

JPM, Financial)

Horn sold 7,900 shares of the position, or 9.58%. He has an estimated gain of approximately 46% on the holding started in first quarter 2016.

JPMorgan Chase & Co. has a market cap of $301.81 billion; its shares were traded around $84.95 with a price-earnings ratio of 13.09 and price-sales ratio of 3.18. The trailing 12-month dividend yield of JPMorgan Chase & Co. is 2.27%. The forward dividend yield of JPMorgan Chase & Co. is 2.38%. JPMorgan Chase & Co. had an annual average earnings growth of 8.7% over the past 10 years. GuruFocus rated JPMorgan Chase & Co. the business predictability rank of 2-star.

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Bernard Horn (Trades, Portfolio)'s portfolio here.

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I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.