Hi Jim and all! So it appears the financial crisis of the spring with increasing interest rates is finally subsiding a bit. And although loan activity still seems to be headed lower as those higher rates hurts the housing and commercial sales markets, it seems like a good time to take stock of my banking stocks, especially my mutual savings bank holdings.
For quite a long time, I have allocated a reasonable percentage of my investment portfolio to mutual bank conversions. Adding new ones and selling off older ones that were either bought or didn’t work out for whatever reason.
I always thought that this was a good process that although it never went crazy like finding a good “NVDA” or SAAS stock, did do quite well over time and added a nice ballast and balance to my portfolio.
But in the last 6 months to a year that obviously hasn’t worked well. Almost all financial institutions have been chopped down in price pretty substantially, including most mutual conversions. I am in the process of trying to evaluate this and see if I need to make changes.
I don’t really make big changes very fast so I have been just mostly watching but I have noticed that some of my mutuals have done okay, with their prices hanging in there (none really doing well) and some getting hit quite hard. I understand that they all have to be looked at in an individual basis in terms of net interest margins and deposit growth but where I am struggling is trying to look forward. I don’t want to sell because the price has dropped a lot even if there is good reason because it is too late. The question is whether the deep value typically involved in these mutuals (I.e. true book value per share) will win out over the next few years as the financial markets stabilize and interest rates/ inflation rates stabilize (assuming they do).
So, Jim (or anyone else), do you have have favorites that have come through the last 9 months better than others? Or conversely, do you have any that have been decimated but somewhat unfairly and have the promise of a nice bounce back in the next 18 months…. Or, is there concern that these companies have been hurt badly and the embedded losses are likely to hold them back for some time, if they survive at all. A somewhat more dire prediction.
Just some thoughts swirling around in my head as I look toward year end portfolio management and maybe some tax loss selling, especially since I have a feeling that some of these mutual conversions are almost interchangeable in their value structure, and so selling one to buy another gives a tax loss and no real change in performance (for the ones not in my IRAs anyway).
I continue to think thrifts are an interesting place to be, but some will take time to work through loan books that were written at much lower rates as well as the effects of going neck-deep in low-rate bonds. A decline in rates would generally help the sector in the short term, especially those marginal companies that have been hardest by low rates. But if you think huge federal deficits will necessitate a higher level of rates going forward (even if rates may decline in the short term), then it’s important that any potential bank has a portfolio that can be resilient in that environment. As we know, many of these small banks do not have good governance.
I continue to like FFBW for reasons that have been elaborated before. The bank still has a massive equity cushion and low reliance on residential mortgages, and it’s been continuing to eke out share buybacks after absolutely enormous repurchases before. I suspect it’s on the buyout path at some point, after having passed the three-year moratorium, but not sure when. The P/TBV remains low, so even if this one goes out at 110%, then there’s still some nice upside and more if they keep repurchasing stock. After the drop from the announcement that it would delist, the stock has held up pretty well.
I also continue to like WMPN. It looks like the management is repurchasing stock aggressively and will be willing to sell the bank at the right price once it passes the three-year moratorium in March 2024. It’s in metro Philly, so it could be a nice pick-up for someone looking for that exposure. Still overcapitalized and plowing through 10% repurchases in months. The stock has held up reasonably.
PBBK may also be interesting. You can see a presentation from their CEO at the recent small bank conference (as well as some market commentary): https://virtualbankconference.com
Much appreciated, Jim! Reading between the lines, I sensed those two were high on your list, but always good to hear it straight up. I agree with Randy, it’s been a little quiet here, really since the big conversion.
I’m largely sitting and waiting to see how events play out. I still think we’re going to see a recession and that it’s not a good idea to call the Fed’s bluff here, but many investors are willing to do that.
Crowding into stocks, such as what we’ve seen with the Magnificent 7, is the type of thing that happens near tops, as traders look for safe havens and short-term profits.
I don’t know when we will get a recession. But how long you are going to wait for a recession? What if it is shallow one and we bounce back quickly? How far stocks have rallied from October low’s is telling. I wanted to buy RF (Regions Financial) but I was so over allocated to banks, before I could make up my mind it rallied from $14 to $18, that is 28% rally. It is not just RF, but so many names.
I think After 2000, 2008 and 2020, many investors are scared and wait for the bad things to happen. I am also in that category. I carry a huge cash position. I think we should consider a probability for various outcomes.
Yes, I haven’t been adding to positions at this point, and have been building cash, which now offers a decent return in exchange for “no risk.” So I’ve been splitting the baby here, staying allocated to what I already hold and then building cash, which may be 20% of the investible amount now.
All of 2022 companies were talking about Recession and we even had two quarters of GDP contractions, but we were/ are not ready to call or accept that as recession. It gave a great opportunity to buy Mag 7 and probably you would have had anywhere between 60% to 80% gains on those purchases. If everyone is expecting and preparing for a recession … may be recession is not going to happen…
How much credibility Fed really has? I think it earned folks skepticism. I respect Fed’s money printing abilities and what it can do to market but I am very skeptical that Fed truly knows what is ahead or even understand what they see or want. Their “inflation is transitionary” to hyper aggressively raising the interest rates to “higher for longer”, which everyone reads as when they will start cutting rates… demonstrates they have no special skills.
On my investment accounts , I started the year with almost 25% cash and it got down to 20% because my portfolio moved up by 25%, and I cannot shake the thought… am I scared of the gains, am I not worthy of gains… are you tired of winning?
May be this is how people behave at Peak… FOMO…
Anyways, it is easier said than done but I am leaning towards “shoot first and ask questions later” or Hurry up Buy and worry
Like I posted yesterday, this Fed credibility is low. The ink on “higher for longer” is not yet dry, already they are talking about possible cuts in 2024. The biggest challenge for me is to overcome my own fear… for ex: I nibbled on IWM and today I bought some SPY before Fed $464.20, only to turn around and sell $466.82. I am still not comfortable to establish new positions at these levels… but…
It’s absolutely a difficult time at this moment, given that various indicators are pointing different directions.
I’m somewhat surprised by the Fed’s pivot here, given previous statements, but we’ll see when they actually do lower rates. The market has now waffled forward to March again as the date of the first cut.
Yeah, I don’t know about 3 cuts in 2024, but I think right now all the Fed is trying to say is “we’re not doing, without new events or circumstances occurring”… higher for longer is embraced by not doing anything right now.
If the rates keep falling or the inflation falls (this is primarily held up by housing and used car) the Fed will have no choice but to cut, because Fed rates vs market rates and the real return earned will be so high…
We don’t know what future holds but don’t be surprised if we end up having more than 3 cuts in 2024.
You all are making good points, and that’s why I try not to over predict. Me, I try to keep a diversified portfolio and don’t let the market pundits affect that portfolio diversification too much. I can’t say I don’t lean a little bit towards the direction I think it’s going but I try not to go out on a limb too far.
As an example, I have been bumping my dividend / finance / bank stocks and trying to cut back a little on the ones that have been going crazy. In fact, the last couple of days I have cut back a little.
But really these moves are all in the noise if you look at my entire portfolio. I just think it is impossible to predict where things will go. Last spring everyone was convinced the banks were going to suffer severely and we were headed to a recession, now it feels like the opposite. Who knows….
