BOFI: A new look and reassessment

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.

and see http://discussion.fool.com/1069/let-me-try-this-one-more-time-im…

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,

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

62 Likes

Very big of you Saul. I stayed in the whole time but I admire your sense of risk and priority.
Ant

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Two thumbs up for your sound reasoning and common sense approach to your BOFI sales and newly established small position.

We all learn when you speak, Saul.

Thank You from us all.

Jim

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I hope that this has been an interesting read,

Saul

Yes!

Denny Schlesinger

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SaulR80683: I went ahead and re-established a small position yesterday (Monday).

BofI was mentioned in a Marketwatch article, “Boring no more — these banks have found ways to make money,” this morning.

link: http://www.marketwatch.com/story/boring-no-more-these-banks-…

6 Likes

I’ve been adding since late January. I may have posted this, but the float is 57.6 million shares, 40.38% are shorted, and the latest 10-day average volume is 673,264 shares (source: E*Trade). BOFI is up 25% in less than 3 months. One wonders what it will take to set off a short squeeze.

KC

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What I wonder is why the shorts have not yet covered.

Mike

BofI Holding, Inc. Short Interest

http://www.nasdaq.com/symbol/bofi/short-interest

Seeing how short interest grows and shrinks is a good indicator of changing sentiment

Denny Schlesinger

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As an investor, there seems to be certain lessons you can only learn after experiencing them firsthand. I’ve only been investing since 2011, so until now, I’ve never really dealt with a down market. The most valuable thing I’ve learned from this downturn is that you can just about always find companies at a better value point sometime in the future, no matter how well run the company may be. They may not get below a certain price, but they will eventually get to be a better value.

I’ve read hundreds of posts by both Tom E and Saul, and they both discuss this concept. While they go about it differently (Saul often sells shares that aren’t trading at a good value and buys companies that are, while Tom simply waits to add money at good value points), the idea is the same. And it’s a really simple concept, but it’s a tough one to follow.

BOFI is a blatant example of it. I didn’t believe the allegations against them were true, so I held my shares. However, I also knew that it was going to take many months for the dark clouds to pass. So, even if the share price just stalled (instead of crashing like it did), we knew we could get a better value point later just by the growth in book value. I did add a bit on the way down, so I’m not kicking myself, but it would have made much more sense to do what Saul did in this case.

4 Likes

What I wonder is why the shorts have not yet covered.

They could be protected by options. Sell a stock short at $10 and buy a call strike price $10. The stock goes up, exercise the option and cover the short.

Denny Schlesinger

PS: I don’t short shares, only options (covered calls).

2 Likes

A couple of possible issues:

Some people just short a stock because it’s gone up: “It’s up 50% so it must be overvalued,” regardless of the fundamentals. BOFI is up 62% from the bottom of the Feb 11th nosedive (even though it’s only at 14 times earnings, and growing earnings at over 30%).

The people who were short all the way to the bottom, the professionals (Aurelius and company), closed their shorts (no more articles since then, they’ve moved on). But new retail shorts got sucked in at the bottom. Someone had to be selling when the pros were buying to close their shorts. The retail shorts are then left holding the bag. It’s the inverse equivalent of the long situation we’ve all seen, when professionals hype a stock and sell out at the top, leaving the retail longs holding the bag.

Saul

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Hello Denny,

They could be protected by options

I thought of that, however it appears that there are only about 8500 call contracts outstanding in total. 850,000 shares on call does not
provide any protection for over 24,000,000 short.

Best regards,

Mike

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Hello Saul,

The volume of shorts outstanding versus the volume of stock traded would seem to preclude the type of activity that you have offered as an explanation why the short totals have not declined much. Say that the pros originally established a short position of 13,000,000 shares (50% of the high shorts). For them to close that position in the past two months and only have the total shorts outstanding decline by a couple million just
doesn’t seem realistic. Some of the covering in the past two months must have been done by retail investors who were happy to take profits and go on to another trade. There was some significant institutional buying in Q4 and one would guess that it continued in Q1 as the price was lower until mid-Q1 and has risen since.

It appears to me that the professional shorts are still around. I am long BOFI and am concerned that this intelligent, market-savvy cabal has not yet closed out a very successful trade. They have been quiet on SA and not yet closed their positions. It seems like they must believe that they have another chance coming to exit lower. There is some potential for an earnings miss as the expectations of the covering analysts is for a high comp the next two quarters; however, a slight miss would probably not take the stock down to the lows of Q1.And there is also a chance that the high comp expected will be exceeded. (what I expect)

Perplexing, but that is what makes a market…

Nice to see you back in.

Best regards,

Mike

3 Likes

I thought of that, however it appears that there are only about 8500 call contracts outstanding in total. 850,000 shares on call does not
provide any protection for over 24,000,000 short.

How about puts? Buy calls = sell puts.

Where do you find outstanding option numbers?

Denny Schlesinger

How about puts? Buy calls = sell puts.

Did I just blow a fuse? I better quit while I’m ahead. :frowning:

The Captain

No position in banks.

1 Like

Hello Denny,

Where do you find outstanding option numbers?

http://www.nasdaq.com/symbol/bofi/option-chain?money=all

Not many puts outstanding either,

Best regards,

Mike

I like Saul, sold all of my Bofi but a sliver, and I too have been reevaluating…just noticed there was a big jump in price today. Anyone know the catalyst?
Thanks,
jille

Anyone know the catalyst?

Saul changed his mind :slight_smile:

DT

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Good one Thomas heh heh :slight_smile:

Frank

A good / bad example is me buying TWTR and holding it while waiting for long term results and then finally selling in disgust.

Very disheartening.

Frank