BOFI: A new look and reassessment
I had been a stockholder in BOFI for about three years when the troubles hit last year, starting with the young internal auditor who lost his job (or quit), and then sued the company after making a lot of allegations…followed by the resignation of the senior internal auditor (who had previously worked for a bank with serious scandals)… because of “overwork”, and then a series of short attacks.
At first I wrote posts defending the company, and making excuses for the erratic performance of the CEO in conference calls (see http://discussion.fool.com/1069/what-could-have-happened-with-bo… and http://discussion.fool.com/1069/i-have-to-admit-that-i-was-a-lit… ), but as short attacks started to pile up in October I started to worry:
I wrote yesterday that I was uncomfortable with the conference call but I tried to make excuses for the CEO, but something just doesn’t smell right about this, and about the market’s response. I decided today that I wasn’t comfortable with such a large part of my portfolio at risk (it was about 14%) and acted accordingly. I kept just a very much smaller amount. If it turns out that there’s nothing wrong and this is on its way to be a 10-bagger from here, there will be plenty of time to rebuild my position, but I can’t get rid of the feeling that something just isn’t right.
I felt that these were not the standard “this company is overpriced and I see 40% downside” type attacks, but clear accusations with lots of documentation, mostly from the company’s own filings. Not being a banking expert I didn’t know whether anything that was being alleged and documented was actually illegal, or whether it was just being presented in a way to make it look bad. It certainly did look awful.
I decided that the prudent course of action was to reduce my position, not because I was sure there was anything wrong, but because I wasn’t sure that everything was okay. I thought it risked an announcement any day that some agency was starting an investigation, which would really tank the stock. I sold a little at $138 to $134 (this was before a four-for-one split), and then most of my position at $116 to $109. (I had bought in three years previously at just under $28 pre-split, so this was a very large profit and a large position by this time). I bought a little back in the $80’s and got scared again and sold out those few shares finally at $94.
I had made it clear that I would buy back if it all cleared up, and wouldn’t even mind if I bought back at a higher price. I wasn’t trying to make money on the trade/ I was just being prudent and careful and trying to avoid extreme risk.
What I was most worried about was people ignoring the short attack articles, and saying “Oh, it’s just another short attack,” and dismissing them without considering what they were saying. That, I thought, was insanity. When I pointed it out, I was attacked as a turncoat and traitor, which is not at all the way you should think about negative views about a stock you are holding.
On Feb 11th, the bottom recently, BOFI got down to $13.50, or $54 pre-split. You’ll remember I got out of my original position between $138 and $109, so riding it down to $54 was a long, long, way down.
We are now in mid-April, and it is more than seven months since the short attacks began, and the second shoe hasn’t dropped. There seem to be no new investigations by any agency. I had been considering reestablishing a position. All the news from the company has continued to be good. The price hasn’t continued to descend to zero, but has rebounded and last Friday finished at about $21.25 (or $85 pre-split).
I read a very well-written positive article by TMF 1000 (Tom Engle) on the RB BOFI board http://discussion.fool.com/1069/bofi-page-8-32196504.aspx , which pushed me over the edge. I went ahead and re-established a small position yesterday (Monday). I paid about $21.50 to $21.70 (which comes to $86 to $87 pre-split). I thus made a little money by being out and buying back in lower, but, as I said above, that wasn’t the goal. It was avoiding what seemed like a high-risk situation, as well as the risk of getting scared out and selling at $16, or $15, or $14, when it looked like there was no bottom.
Some people will say “Oh! You changed your mind again!” If I did I’m proud of it, as you should always change your mind when new evidence emerges. (In this case the new evidence was that nothing has happened!) However I actually don’t think I changed my mind. I always said I was getting out to reduce risk, and to be safe, and because things looked bad, even though they might not really be bad. As I wrote above “If it turns out that there’s nothing wrong… there will be plenty of time to rebuild my position.” It seems to have turned out that it has all blown over. And the professional shorts seem to have left the field. Aurelius’ last article was Feb 3rd, more than two months ago. For a while they had been coming fast and furious. No regulatory agency seems to have taken an interest. I feel that I’ve been quite consistent with what I had said previously.
I hope that this has been an interesting read,
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