BOFI - What Else?

[FourthStooge]

Fools,

After Fletch’s & Charlie’s writ-ups, there isn’t a whole lot left to say about BOFI. But I’d like to mention some points that may add some perspective.

On a Book Value basis, the current price is near the top of the range it has been in since December, 2012.

Month	BV/Shr.	EPS	TTM	Hi	Lo	Close	P/E	P/TBV	Hi	Lo
Mar-12	15.64	0.58		17.60	15.48	17.08				
Jun-12	15.82	0.64		19.93	16.96	19.76				
Sep-12	16.36	0.67		26.66	19.50	26.05				
Dec-12	17.08	0.70	2.59	28.44	23.91	27.81	10.7	1.63	1.67	1.40
Mar-13	18.17	0.74	2.75	36.82	28.02	35.88	13.0	1.97	2.03	1.54
Jun-13	19.16	0.78	2.89	49.98	35.05	45.82	15.9	2.39	2.61	1.83
Sep-13	20.11	0.85	3.07	69.46	45.60	64.81	21.1	3.22	3.45	2.27
Dec-13	21.82	0.91	3.28	82.27	57.55	78.43	23.9	3.59	3.77	2.64
Mar-14	23.51	1.00	3.54	106.55	75.22	85.75	24.2	3.65	4.53	3.20
Jun-14	25.27	1.09	3.85	87.03	71.37	73.47	19.1	2.91	3.44	2.82
Sep-14	27.52	1.20	4.20	82.45	67.57	72.71	17.3	2.64	3.00	2.46
Dec-14	29.58	1.26	4.55	81.00	64.62	77.81	17.1	2.63	2.74	2.18
Mar-15	32.03	1.35	4.90	97.68	75.50	93.04	19.0	2.90	3.05	2.36
Jun-15	33.90	1.54	5.35	108.38	88.06	105.71	19.8	3.12	3.20	2.60
CQ	33.90	1.50	5.65	122.85	105.22	122.85	21.7	3.62	**3.62	3.10**
CQ	35.80	1.50	5.89	122.85	105.22	122.85	20.9	3.43	**3.43	2.94**

The last two lines reflect no growth in BV and 30% YoY growth in BV respectively as well as assumed EPS of $1.50 next quarter (Yahoo analyst estimates). They’ve been growing BV YoY of around 30%, which is why I used this number.

Today’s price of $122.85 reflects a P/BV of 3.6 (3.4 if you assume BV growth this quarter). So the stock price is expensive when looking at it from this perspective.

EPS is growing really nicely, showing a slight acceleration:

EPS	Mar	Jun	Sep	Dec
2012	0.58	0.64	0.67	0.70
2013	0.74	0.78	0.85	0.91
2014	1.00	1.09	1.20	1.26
2015	1.35	1.54

EPSY/Y	Mar	Jun	Sep	Dec
2012				
2013	28%	22%	27%	30%
2014	35%	40%	41%	38%
2015	35%	41%

EPSTTM	Mar	Jun	Sep	Dec
2012				2.59
2013	2.75	2.89	3.07	3.28
2014	3.54	3.85	4.20	4.55
2015	4.90	5.35

Also, BV growth divided TTM earnings growth is (and has been) <1, which means that BOFI is producing a little more earnings for incremental increases in BV. I interpret this as them having plenty of good business to be done with their BV growth.

BVG/EG	Mar	Jun	Sep	Dec
2012				
2013				1.01
2014	1.01	0.99	1.00	0.98
2015	0.98	0.97*		
_*It even improved a little bit_

The efficiency ratio is the best it has been. As Fletch mentioned, it’s pretty amazing that they continue to improve upon this.

Eff. Ratio	Mar	Jun	Sep	Dec
2012				41.0%
2013	42.1%	42.8%	41.4%	39.9%
2014	35.1%	34.9%	34.8%	34.6%
2015	34.5%	**31.6%**

So while BOFI is continually improving its business, the price of its stock is pretty high when measured on a BV basis. Last year, particularly, the stock price stalled for quite a while and actually fell to relatively low value points, providing us a great opportunity to buy more shares. However, there was no real business reason for this. The business has been executing very well throughout the last few years.

This makes me think that something like this will happen again, enabling us to buy again at a better value point. If there is a big market sell-off, we may see a lot of money move out of this bank stock with a 3.6 P/BV.

Many of us on this board mention the possibility of a significant drop. Perhaps we’re forgetting that the lack of upward movement in the stock market this year is no different than if we had a correction and recovery in the same period. When corrections occur, they usually run their course pretty quickly.

And many of us are anchoring on Saul’s returns this year. We probably feel like the market is really high, because our investments (assuming we take some advantage of this board) are doing very well.

That said, maybe BOFI will continue staying highly valued for a very long time and grow right along at the same pace as its assets. Five years from now, we may look back at today’s price and think it was a bargain.

DJ

[wkimzey]

FourthStooge,

Since I am late to the game (party?), I would like to grow my position
in BOFI at good value points. So I took your great data set and mapped
against recent dips.

Most Recent Q/K	  Dip    	Lo	 TTM	P/E	BV/Shr	P/BV
end July        10/10/2014	65.67	 $4.20 	15.64	27.52	2.39
end Jan	        3/10/2015	87.66	 $4.90 	17.89	32.03	2.74
end Apr	        7/28/2015	112.59	 $5.35 	21.04	33.9	3.32
						
today's TTM PE: 25.11	today's P/BV: 3.62

A good price point (P/BV 2.74):  $92.78

A great price point (P/BV 2.39): $80.89

The dips were market wide if I recall. Greek debt and something last
October--fear QE was over? Anyway, easier to jump in on, perhaps,
then something specific happening to BOFI.

Thoughts?

Thanks again for your data set and provoking this question,

Bill
PS. I just eyeballed the PPS dip on a chart ... so could be off by a bit.

[bulwnkl]

DJ,
Thanks for putting that together. I have been following BOFI , and I have been giving PB value some thought too.

If we look at Wells Fargo (WFC)as the gold standard bricks and mortar bank, they have

PB ratio = 1.76
Efficiency ratio = 60.49% (Bankregdata.com)

Since BOFI has an efficiency ratio of 31.6, wouldn’t BOFI produce

60.59/31.6 or 1.92 times more profit than WFC.

If we apply that to the PB valuation, wouldn’t it make sense for a parity PB ratio to WFC as

1.92 * 1.76 = 3.37

I’m not an expert on bank stocks by any means, but it seems like on an efficiency ratio normalized basis, WFC ~ BOFI. The question that comes to my mind is that should WFC and BOFI be thought of with the same valuation? WFC should have a bit of respect because they made it through the last financial crisis with flying colors. The jury is out for BOFI during tough economic times. My guess is that BOFI will be fine.

Does this line of thinking make sense to everyone?

bulwnkl

Long BOFI since 10/2014

[creelon]

Hello,

I am not sure that it makes sense to compare BOFI with Wells Fargo. WFC is among the largest banks in the world. (perhaps, the largest US bank)WFC has been in business thru many business cycles. They are competing in nearly every form of financial service endeavor.

BOFI is relatively new and untested. Yes, they went through the financial crisis of 2008 with a constantly improving income statement, they had not reached a scale then to have gotten into serious trouble.

That said, I agree that the direction and absolute levels of the efficiency ratio between the companies will have some correlation to the price/book value relationship. I do not agree that the stated number for BOFI is appropriate. They stated that this number was enhanced by the one-time dividend of the Federal Home Loan Bank and gave the number without the dividend. After making that adjustment, we would get a relationship that was 100% correlated to the efficiency ratio differences. One could then put some estimated value judgment that would eliminate all the other factors that might reasonably account for a valid difference. When we get done, whatever the new result could be debated infinitely. My conclusion is that one should intuit that BOFI deserves a higher P/BV and not attempt to take it any further. I would tend to look at the historical P/BV of BOFI and conclude that it is quite high today as far as committing new funds.

In my mind, the prospects for BOFI in the future are so compelling that if I determined that my position was not “full”, I would look to add some on price weakness without regard to where the bottom of this next move might go. Setting arbitrary “good” or “great” entry points and then waiting for that to occur is IMO, another form of price anchoring. I believe it is best to establish a core position then add small increments until the optimum position is attained.

I would also point out that the Motley Fool community (not just Saul’s board) is very high on BOFI) and seems to be most attentive around earnings announcements. Something tells me that is perhaps not the best time to initiate purchases.

Best regards,

Mike

[wkimzey]

By “good” and “great” prices, I’m not price anchoring; I’m anchoring around a PE or P/BV ratios. Basically following TMF1000’s lead. I’ll adjust price targets with each quarters results. I’m not a sophisticated investor … I hesitate even posting on this board … but targets like this (pre-set, outside the emotion of a crash or a dip) give me confidence to move … they help me managed the emotional side of investing. It’s been working for me. I should also add these are not blind, automatic triggers–I’m not setting up trailing-stops for example. I’ve done that in that past and that has caused it’s own breed of mistakes. I try to keep this as simple as I can.

thx,
Bill

[XMFRob]

Since BOFI has an efficiency ratio of 31.6, wouldn’t BOFI produce

60.59/31.6 or 1.92 times more profit than WFC.

If we apply that to the PB valuation, wouldn’t it make sense for a parity PB ratio to WFC as

1.92 * 1.76 = 3.37 – bulwnkl

It seems that there is a lot of reasonable thinking in this thread (and bulwnkl’s creative analysis being some of it).

I’d just like to caution folks not to get terribly caught up in justifying BOFI’s very high P/BV. IMO, BOFI’s valuation as a company is kind of in uncharted territory because the valuation and the business model and the performance (especially the efficiency ratio) aren’t anywhere near “average”.

It’s way out there. Comparing it to “statistical talk”, this is at least a 3 Sigma kind of company situation and trying to apply normal valuation analysis to it assumes a lot because it is so different.

Am I saying that it’s not worth it’s current price?

By no means!

In a round about way, I’m saying that the market could easily decide one day (during some episodic market downturn) to just completely hammer the share price. Quite easily it could drop a BUNCH! Evidence? Look at FourthStooge’s chart: http://discussion.fool.com/bofi-what-else-31853656.aspx

Currently, BOFI has a P/BV around 3.4.
Last year, it dropped as low as about 2.2.
In 2013, as low as about 1.5.

Yes, arguably those low historical numbers could be “because BOFI hadn’t proved itself so much”. It could also be that we’re currently pushing the valuation envelope!

Remember that I’m not saying that the current price is unreasonable. But I am saying the market can at times be unreasonable. Don’t be shocked if you see a huge pullback someday with BOFI. Instead, be prepared. I typically am nearly 100% invested, but I expect to soon have a lot of cash. I’m going to keep a nice cash cushion to take advantage of unreasonable drops in various companies…… and BOFI appears to be a poster child for unreasonable drop potential (UDP…LOL).

WHEN that happens (not if), I’m going to swoop in <cue Ride of the Valkyries > and buy a bunch more.

Rob
BOFI currently 9.6% of portfolio

[strelna]

Rob, BOFI is 9.6% of your portfolio. However, you think it is a poster child for a serious fall. When that happens, you intend to ‘buy a bunch more’?

Gosh. This is a manner of investing I have not previously encountered. I do not think even Jim Slater, who invented the PEG ratio decades ago (although John Neff used a similar ratio which included yield years before that) and who was no slouch at risk-taking, would have been so daring.

[GauchoRico]

Rob, BOFI is 9.6% of your portfolio. However, you think it is a poster child for a serious fall. When that happens, you intend to ‘buy a bunch more’?

Gosh. This is a manner of investing I have not previously encountered. I do not think even Jim Slater, who invented the PEG ratio decades ago (although John Neff used a similar ratio which included yield years before that) and who was no slouch at risk-taking, would have been so daring.

I think when you have conviction about the value of a stock then a big drop in the price does not matter so much ( assuming you don’t need the cash for a while). One can not predict if and she. A big drop might occur. On the other hand. If you think a stock is overvalued then a big drop is a big deal and you would have been better off selling before the drop.

[XMFRob]

Rob, BOFI is 9.6% of your portfolio. However, you think it is a poster child for a serious fall. When that happens, you intend to ‘buy a bunch more’?

Gosh. This is a manner of investing I have not previously encountered. I do not think even Jim Slater, who invented the PEG ratio decades ago (although John Neff used a similar ratio which included yield years before that) and who was no slouch at risk-taking, would have been so daring. – strelna

Nonsense!

If you had a company that was firing on all cylinders, growing like crazy and the market decides it’s “too expensive” and the stock drops….yet you decide the market is wrong and you buy more:

…you view that as a risky move?

What did you do after the last market crash?

I shifted my assets into 100% stocks in early March 2009 and bought some seriously beat down companies. Why? Because they were due to do well in the ensuing recovery!

A few years later I retired. At 57.

Look at this:

1. Buying great fast growing companies when they’ve been pounded down unreasonably is a great way to build your wealth. Buy, wait, reap the reward.

2)It’s also great to buy companies when they’re doing great and they’re cheap BEFORE they go up….that’s what’s being typically discussed on this board.

Can’t you see that #1 and #2 are the same*? Great companies at a cheap price that will soon be worth a lot more.

A rebuttal might be: “Buying beaten down stuff is not as good.” Oh yeah?

What about all the folks who bought great companies cheap at the end of the last downturn? Was that risky? Should people have shunned Starbucks at $10? Baidu at $15? Chipotle at $50? American Express at $15? For that matter, what about the recent setback for SKX and SWKS? Should you run from them or add more?

Buying strong, growing reasonably priced companies after a price setback is shooting fish in a barrel. It’s not shooting yourself in the foot.

Rob

*Keep in mind that I’m buying due to a market reaction not due to company performance issues. Just after a “price correction”.

[anthonyms]

…you view that as a risky move?
Rob - I read this comment differently - my interpretation was that it wasn’t the buying after fall, it was holding the stock going into a fall. If you are certain a fall is going to happen then why not sell and buy back after? Maybe I got it wrong. I don’t think there are many instances where buying low is a risky move (except mining stocks on a low p/e).
A

[dumaflotchie]

shifted my assets into 100% stocks in early March 2009 and bought some seriously beat down companies. Why? Because they were due to do well in the ensuing recovery!

Rob:

Congrats on retirement at age 57!

This one statement encapsulates why many on this board won’t have the option of shifting assets IMO. If most are following along, Saul stays overweighted in stocks with 1-2% margin.

In a serious market correction, he won’t have the luxury of moving NEW money to beaten down stocks.

This happened to many people in the Y2K crash as well…money was tied up in already beaten down stocks.

That said, I think your point about buying what has fallen into disfavor is exactly what should be done if one has the conviction that the sector/industry is sure to recover.

One such sector that has taken it to the chin recently is the oil of course.

[XMFRob]

Rob - I read this comment differently - my interpretation was that it wasn’t the buying after fall, it was holding the stock going into a fall. If you are certain a fall is going to happen then why not sell and buy back after? Maybe I got it wrong. I don’t think there are many instances where buying low is a risky move (except mining stocks on a low p/e).
A

Huh!

You may be correct.

That’s a good question. The thing is…. EVERY company any of us own is likely to have strong pullbacks. Sooner or later. I have no idea when and I’d rather just stick with a company that is performing well than try to guess when the market may take a dump on it. In other words, I’m happy to scoop up more at bargain prices (whenever that comes), but I’m not going to risk selling what appears to be an extraordinary company and watch the price run away from me.

With BOFI, that P/BV is really high for “an average bank”. Is it too high even for a company performing at BOFI’s level? Could well be, hence the thought that we could see a nice share price tumble as long as the value is so high. If the market “goes stupid” and drops it down to a P/BV of 2, I’d be delighted to buy more shares.

Rob

[XMFRob]

This one statement encapsulates why many on this board won’t have the option of shifting assets IMO. If most are following along, Saul stays overweighted in stocks with 1-2% margin.

In a serious market correction, he won’t have the luxury of moving NEW money to beaten down stocks.

This happened to many people in the Y2K crash as well…money was tied up in already beaten down stocks. – dumaflotchie

This is what happens when I leave out the details……

Duma, I didn’t have a stash of cash to buy stuff on the cheap. I sold beaten down holdings that didn’t offer as great a “rebound opportunity” in order to buy the ones that I knew would be multi-baggers.

Was I right in every case?

Absolutely not!

I bought some AXP at a ridiculously low price (near $10) and sold somewhere in the high teens so I could buy something else that looked like it had more potential. Maybe I would have been better off to keep AXP, maybe not.

I bought a huge amount (for me) of ATPG starting at $3…. rode it up to around $24 or so…. but didn’t get rid of everything at the peak. I sold in the low 20s all the way down to the high teens. I was too hopeful that the company would fix some problems that had started to crop up. Better to have sold when the bad news started. Which I should keep in mind for other companies I’ve bought since then. I always keep learning. Sometimes I have to keep learning the same thing over and over but I try to avoid that.

Ditto with Ford. I ended up with a 40% portfolio allocation in Ford stock shortly after I retired thanks to the fabulous comeback of the company. But I held too long, thinking there would be a better 4Q 2010 report that would push the share price over $20. Didn’t happen and I sold everything in the high teens “at a loss” from the peak price. Too bad, but it’s hard to buy at the bottom and sell at the top. Does that mean I don’t try? Of course I try. Why not?

In the meantime, I’m happy to sell good companies or even great companies if I think something else offers better opportunity. That’s not terribly consistent with Fool philosophy, but it’s more effective. After all, why stubbornly stay with a wonderful company growing at 25% per year if you have every reason to think that a better one will double this year?

Caveat: Assuming you’re operating in IRAs. My actions would have to be modified for taxable accounts.

Rob

[strelna]

Rob, answers are:

No.

Averaged down into SPY all the way to the bottom after Andrew Smithers said value had been achieved.

Yes, I can see that #1 and #2 are the same and I completely agree with you.

Oh definitely not yeah; again, I agree, providing the company is a good one…

No, no, no and no (although they should shun them all now). On SWKS, some caution warranted.

You have raised investment truisms with which I agree but missed my point. Risk lies both in the size of your holding and also in the fact that you think it may well be overvalued.

[FourthStooge]

Hi Bill,

The dips were market wide if I recall. Greek debt and something last October–fear QE was over? Thoughts?

While macro events can and will have an impact on the stock price, I’m learning to focus more on the underlying business and try to add at decent value points.

So while QE & Greece may have had some influence on BOFI’s dip last year, it was absolutely no part of my investment thesis, and I used the dip, combined with the analyses on the various BOFI boards, to buy more shares.

The best thing is that I am (and was) more confident in my decision to do so, because of the analyses.

The P/BV may be high. But the P/E is very good for a company growing its earnings so quickly. So I ask myself if we’re buying a piece of the BV or a piece of the earnings. To illustrate my point, I’ll use a ridiculous example. We’ll only get a piece of BV if and when BOFI sells its assets. We’ll get a piece of the earnings every time BOFI earns more. That BOFI is disrupting the banking industry by creating more earnings per unit of BV is my reason for not really caring if the P/BV is expensive now. As long as they execute their business, I’ll keep adding when the price drops (a good value point is about 2.6 - it got there in the not too distant past - see the table range).

However, as Rob and others have mentioned, BOFI looks pretty expensive using P/BV as the basis. And if you take a look at the historical ranges in P/BV, we shouldn’t be surprised to see a pretty big pullback. Given the fact that a lot of investors probably use BV to value any bank, there is a good chance that they’ll get out of BOFI fast if something macro happens. This is okay, because we know that BOFI is a great business, and we will be happy to buy it for a lower price.

DJ

[XMFRob]

Rob, answers are:

No.

Averaged down into SPY all the way to the bottom after Andrew Smithers said value had been achieved.

Yes, I can see that #1 and #2 are the same and I completely agree with you.

Oh definitely not yeah; again, I agree, providing the company is a good one…

No, no, no and no (although they should shun them all now). On SWKS, some caution warranted.

You have raised investment truisms with which I agree but missed my point. Risk lies both in the size of your holding and also in the fact that you think it may well be overvalued. – strelna

Well, that’s a bit difficult to follow.

As to missing your point, I didn’t directly address all of it. I’ll do that now. But apparently you missed my point that one doesn’t necessarily sell their position because one feels it’s overvalued. That’s a recipe for missing out on great returns. That may not be obvious, but I’d just point to a company like Chipotle. It always seems expensive, doesn’t it? Yet it’s been a source of great return for those who held on despite that fact. I sold a bunch of shares years ago to fund my daughter’s wedding and would have a lot more money now if I hadn’t done so. But why have money and not spend it for a worthy reason, eh?

Risk being a function of the size of the holding? Not necessarily. Suppose I had a portfolio worth $1 billion and 10% of it was in BOFI for $100 million (roughly the same percentage as I have in BOFI, but not the same portfolio size). Either way, I think BOFI is a great company with a great future. If BOFI stock takes a big hit due to market concerns, so what? It doesn’t affect my ability to enjoy life and I can afford to wait for BOFI to continue growing until my position grows to $300 million or more. Where is the risk? I don’t need to sell while it’s low and I can afford to let it keep growing.

Concentration in strongly performing companies just gives you a strongly performing portfolio, assuming you are willing and able to ride out market downturns. If one is concerned about market downturns, then one has several alternatives:

1. have enough in dividend stocks to pay the bills or
2. keep a cash cushion to pay the bills for several years or
3. have another source of cash to pay the bills (usually a job)

You certainly DON’T want to figure you’re “safe” by investing in your “50th Best Idea” in order to have diversification. Caveat: Some folks invest in 50 ideas (or more) in an attempt to buy a few companies that will be 10-, 20- or 50-baggers in hopes that the big returns from a few companies will result in strong overall portfolio returns. I suppose that’s theoretically attractive, but it isn’t for me. I hope it works for those who try it.

Rob

[strelna]

Rob, I answered your questions in the order they were asked. There were quite a few so I made it brief.

I agree that valuation is not necessarily a reason to sell. With WFM it was a very good reason to sell (and buy KR). (To a quant like me, TMF made the classic mistake of being too close to management.) Same with DDD, but the trick there was to sell after riding the unjustified momentum with a stop-loss which worked out just fine. Chipotle, like you, I expect to be a good example of when it is not wise to sell on overvaluation.

The answer to your question about the risk of having 10% of your portfolio in one company does not lie with the market but the company. Mistakes happen to even the best investors (UK:TSCO Warren? IBM?). Or it can be just bad luck.

On riding out downturns in the market, I do that with some companies, emphatically not with others.

I am amused by your comment that ‘some folks invest in 50 ideas (or more)… I suppose that’s theoretically attractive… I hope it works for those who try it.’ Come now! Surely I do not have to give you a list of great investors past and present. Can’t remember how many Peter Lynch had but it was multiples of 50. (I always rather admired Lynch, mainly because he rode a great bull market for about 20 years and then retired, reputation intact. Oh Bill, you should have done that!)

[XMFRob]

I am amused by your comment that ‘some folks invest in 50 ideas (or more)… I suppose that’s theoretically attractive… I hope it works for those who try it.’ Come now! Surely I do not have to give you a list of great investors past and present. Can’t remember how many Peter Lynch had but it was multiples of 50. – strelna

You edited out a key part of my statement: I suppose that’s theoretically attractive, but it isn’t for me. I hope it works for those who try it. (emphasis added)

Yes, many do it but it’s not for me.

Rob