what do you think is behind the short thesis? 23 million shares is a lot of confidence in something.
I dont’ know. But 23 million share short is worth about $500M and I find it difficult to believe such a big bet is hinging on that court case. To me that case doesn’t sound very strong or can potentially result in a significant damages to BOFI.
Would it matter what the shorts’ thesis is if the court case results in a price rise driven by the longs?
No. But the expectation is the court case will resolve in BOFI’s favor and that will start short squeeze. Frankly at this time short squeeze is the only catalyst to drive the price further. I am not that convinced the fundamental can support a share price of $30 or so as bandied by hopeful’s.
I am not that convinced the fundamental can support a share price of $30 or so as bandied by hopeful’s.
If you believe the numbers (the “shorts” obviously do not) then a price in the $30’s is justified based on the growth rates of key metrics like EPS, deposits, book value which are all 20-30%+ and will probably continue to be so.
Consensus analyst target for BOFI is $32.50:
http://www.nasdaq.com/symbol/bofi/analyst-research
Craig-Hallum recently upgraded BOFI and gave it a $35 price target:
https://www.thestreet.com/story/13685906/1/bofl-bofi-stock-j…
The long thesis is that BOFI has been able to disrupt traditional banking with clever/creative (shorts would say TOO clever) ways of gaining deposits (H&R block, Costco deals, etc.), getting good loans. They have exceptional metrics and are growing extremely fast with reasonable valuation. At only $1.3B or so there is a lot of runway for BOFI. That is the long thesis.
The short thesis is that BOFI is a shady outfit in general. The loan metrics are too good to be true and eventually growth with taper or regulators will step in and sanction BOFI so much that will bankrupt them. The Erhart case is supposed to be the “smoking gun” but is not the sole thing the short thesis is about. In fact short interest was non-existent until around late August of last year when this New York Times article was published:
http://www.nytimes.com/2015/08/23/business/a-internet-mortga…
This was before the Erhart suit broke. When that happened back in October the flood gates opened dropping BOFI from all time highs (around $36 post split):
http://www.nytimes.com/2015/10/14/business/dealbook/ex-audit…
So there you have it, my summary of both the bear and bull cases. I am the “Ticker Guide” for BOFI on the paid side but try to remain as objective as possible. I think the risk reward for BOFI is good here, but of course BOFI is still a small bank which makes it riskier than most investments.
Sincerely,
Charlie
which are all 20-30%+ and will probably continue to be so.
BOFI was lucky to be in the right place at right time. They picked up momentum after the financial crisis. So they had lot of tail-winds and here they are. But taking the past 7 years as a model and projecting they can continue to grow 20 or 30% for the next few years is not realistic. As they grow they need to invest in systems, controls, etc. So far BOFI seems to be reacting and lucky to dodge bullets.
The long thesis is that BOFI has been able to disrupt traditional banking
Servicing fringe or niche market is not disruption. BOFI doesn’t have any significant differentiation in my opinion. A branch less model is not something that cannot be replicated or a differentiation in any significant way. The way I see is, all other banks have branchless model and a branch model. May be you didn’t mean to use “disrupt”.
The short thesis is that BOFI is a shady outfit in general. The loan metrics are too good to be true and eventually growth with taper or regulators will step in and sanction BOFI so much that will bankrupt them.
We need to see how the loan book performs in a downturn. One thing for sure we know is there is no reserve for loan loss and any significant loss means the banks has to raise capital in hurry. I also believe BOFI is hitting certain limits on its growth and it will find growth slowing down pretty fast.
With due respect the comment on bankruptcy is silly. You can short a stock based on valuation. You don’t need the company to go bankrupt for your short thesis to work.
May be short thesis is based on “Erhart” suit or the timing could be just coincidence. Let us hope we are not confusing, correlation as causation.
As of Friday, I sold my BOFI shares to make room to add BAC, WFC short. I already own C. My banking thesis is raising interest rate and I find big banks like Citi and BAC are better placed.
Of course a small cap can always move fast and high, especially when a huge short interest is behind it.
Good luck.
Dear CM001,
You definitely bring up some valid points, my main concern regarding BOFI was “would the growth” continue. So far so good, but we must keep an eye on the metrics each quarter.
BOFI was lucky to be in the right place at right time. They picked up momentum after the financial crisis. So they had lot of tail-winds and here they are. But taking the past 7 years as a model and projecting they can continue to grow 20 or 30% for the next few years is not realistic. As they grow they need to invest in systems, controls, etc. So far BOFI seems to be reacting and lucky to dodge bullets.
It doesn’t seem at all they are reacting and lucky to dodge bullets. Listening to the last conference call the operations are firing on all cylinders despite all the noise regarding the lawsuits. The new H&R block deal will be a big boost to business and the auto leasing program they acquired looks to be on a good start. They are investing quite a bit into improving their web/app technology as well.
We need to see how the loan book performs in a downturn. One thing for sure we know is there is no reserve for loan loss and any significant loss means the banks has to raise capital in hurry. I also believe BOFI is hitting certain limits on its growth and it will find growth slowing down pretty fast.
With due respect the comment on bankruptcy is silly. You can short a stock based on valuation. You don’t need the company to go bankrupt for your short thesis to work.
May be short thesis is based on “Erhart” suit or the timing could be just coincidence. Let us hope we are not confusing, correlation as causation.
The bankruptcy thing was just hyperbole, what the SA short articles usually claim. You are correct, a good short play doesn’t have to be all or nothing, like I mentioned slowing growth was a big concern of mine as is yours.
Before the lawsuit thing hit BOFI bear arguments was based on valuation. This was between 2012-2014 (I started following BOFI early 2012). Then in 2015 they kept delivering monster quarterly results which dropped short interest to almost nothing and sent the stock price up from $80 to $140 (pre split, 14 straight weeks of gains I think).
As of Friday, I sold my BOFI shares to make room to add BAC, WFC short. I already own C. My banking thesis is raising interest rate and I find big banks like Citi and BAC are better placed.
This seems like a prudent move and it could work out.
Sincerely,
Charlie
P.S. Please continue posting on the other boards, I like the arguments you make even if they aren’t the popular opinion which slants bullish on ticker specific boards. “Confirmation bias” is the most dangerous thing in my opinion.
If you believe the numbers then a price in the $30’s is justified based on the growth rates of key metrics like EPS, deposits, book value which are all 20-30%+ and will probably continue to be so.
You have mentioned couple of times the risk-reward is good, and the general long thesis is if not short attack the price would be at $30’s. I am curious to see what kind of valuation model you have that gives you $30 stock price.
I understand we may not agree on 3x book value, but what I am interested is how you are seeing 3x book value gets to 2x and the $30 stock price is justified by growth.
You have mentioned couple of times the risk-reward is good, and the general long thesis is if not short attack the price would be at $30’s. I am curious to see what kind of valuation model you have that gives you $30 stock price.
I understand we may not agree on 3x book value, but what I am interested is how you are seeing 3x book value gets to 2x and the $30 stock price is justified by growth.
Current book value of BOFI is $10.67 (as of June 30). Last quarter they grew at 26.1% YoY. Assuming they grow Book Value an average of 20% YoY over the next 5 you get:
$26.55
If you expect growth to continue from there (maybe at 10-15% during years 5-10) then BOFI will be a good buy at these levels.
One more thing, the only metric that BOFI has high valuation on relative to other banks is book value (which is most important for a bank). Based on their growth rates they would be able to support such valuation although nothing is guaranteed (hence risk). However on an earnings basis they are way under valued. They have consistently grown earnings (net income) 25% YoY but their PE is 11.80 TTM. With their asset light business model shareholders will be rewarded with tremendous FCF down the line in form of dividends/buybacks once the high growth stops.
I hope this helps.
Sincerely,
Charlie
Hello Charlie,
I agree that BOFI has demonstrated an earnings growth that warrants a much higher stock price. I believe that because it is a bank, the short cabal was attracted based on some of these reasons:
No one can argue that the shorts have not been successful thus far. No one can argue that BOFI’s stellar fundamental performance will be damaging to the shorts IF it continues. As the shorts have proven to be quite adept in their campaign, I believe that they have an exit strategy planned. I am quite willing to look past this near term uncertainty. I am not planning on making a windfall because of a short squeeze, but rather reaping the rewards of a long term shareholding that will benefit from a full-blown effort to digitize the world of banking. I see a very long runway for a company committed to utilizing the branchless bank format to deliver service to customers. BOFI is not your grandfather’s bank or even your father’s. I would urge everyone to study the investor presentation shown in the recent 8K filing.
The big banks will compete; but they do so with lots of capital tied up in assets that are less productive every year while BOFI’s platform will grow stronger every year. The big banks are burdened by having to provide all the services their customers wish even though the wishes have diminished over the years. In contast, BOFI can selectively enter markets on risk/reward opportunity. The bigs are further burdened by a risk profile that is highlighted by securities trading, loan syndication issues, international issues (currency, trade), and stagnant growth. Regulatory issues are problematic for all banks as the regulators and their constituents impose higher and higher costs of compliance. BOFI’s model, however, can sustain those costs much easier than the traditional banking model.
In my view, the shorts have done a great favor to long term holders of BOFI. I believe that the greatest risk in BOFI is that management will become too enamored of its success and deviate from the systematic, cautious growth that it has enjoyed. Thanks to the shorts, stockholders and regulators will maintain a much greater degree of vigilance going forward with the result than management is more likely to accept a certain 25%+ growth than stretch for 30%+.
US bank deposits exceed $14 trillion. BOFI has around $7 billion of that. At 25% annual growth, in 10 years BOFI will be over $52 billion. I submit that it is not unreasonable that they could grow that fast much longer than 10 years.
Thanks for bringing this discussion here as some of us don’t access the paid boards.
Best regards,
Mike
I agree with all of your post except the following:
I believe that the greatest risk in BOFI is that management will become too enamored of its success and deviate from the systematic, cautious growth that it has enjoyed.
By far, the greatest risk to BOFI is that some of the allegations brought against them turn out to be true.
With their asset light business model shareholders will be rewarded with tremendous FCF down the line in form of dividends/buybacks once the high growth stops.
Every loan BOFI makes is an asset. I am not sure why you think BOFI or for that matter any bank is an asset light model?
At 5 years, BOFI will need to raise their liabilities (deposits) at least to $20B for the growth you are projecting. BOFI not only have re-invest all the earnings but need to raise significant capital to support the growth. Even a 10% growth after the initial 5 year growth would put them into capital raising mode.
So I don’t see how they will be able to do buybacks or dividends.
I think it would be really beneficial if you or TMF analysts can do a proper valuation model. I understand it was a Rule Breaker recommendation. But a bank is a bank and all they do is buy money and sell money. There is absolutely no invention, no patents, no IP, no moat, nothing.
I am not sure the valuation @ $30 is not a compelling case to short the stock. Especially if I can pair it with Short BOFI and go long Citi.
Hello,
At 5 years, BOFI will need to raise their liabilities (deposits) at least to $20B for the growth you are projecting. BOFI not only have re-invest all the earnings but need to raise significant capital to support the growth. Even a 10% growth after the initial 5 year growth would put them into capital raising mode.
I am not sure that under Charlie’s conservative projection that BOFI would have to raise much capital to get to $20 bil. in deposits (even if your assertion is correct.) A point that I would make is that BOFI raising capital at a multiplier of book value goes much further to support growth than Citi at some fraction of book value. In my experience, a company earning around 19.5% on average assets can access capital much more cheaply than a company earning around 7% on average assets.
I am not sure the valuation @ $30 is not a compelling case to short the stock. Especially if I can pair it with Short BOFI and go long Citi. Let’s say that BOFI takes another 12 months (strictly
hypothetical)and has trailing 12 months earnings of $2.40 (a 30% increase y/y)thus its P/E = 12.5. You would then consider pairing a short of this with a long of C? You have a lot more respect for the earnings power/risk reward of big banks than I do! I believe that C’s
status as a big bank that participated in creating a world-wide recession will result in below market returns for some time. The renowned best of the big banks, WFC, just underwent a scandal that we don’t know the effect on shareholder’s returns. This is not good for WFC, BAC, JPM, or C. They do not have to worry about shorts preying on their unsophisticated shareholders; they must worry about their sophisticated shareholders repricing risk.
Best regards,
Mike
Hello Foodles,
By far, the greatest risk to BOFI is that some of the allegations brought against them turn out to be true.
One year ago, I may have agreed with you. In the meantime, BOFI has been scrutinized by the OCC and FDIC along with other government agencies, investors, auditors and shareholders. The net result of all this so far is a serious lack of substance to the allegations. Can you quantify the damage to shareholders that any allegation would effect if proven true?
Best regards,
Mike
a company earning around 19.5% on average assets can access capital much more cheaply than a company earning around 7% on average assets.
BOFIL bond issue 5 year first call with 10 year maturity was issued with 6.25% to raise $75M on the other hand sswn (SSW dividend is 11.21%) is able to raise $350 M at 6.375%. Hertz car rental company can raise $250M for 2021 maturity at 4.125%.
Citi can raise billions at LIBOR +.5%.
For a bank with $1 B market cap (at the time of issue) raising $75 M BOFI should have received somewhere in the range of 3% (that’s the 30 year UST rate) and BOFI is issuing 10 year note but the reason they have to pay 6.25% because BOFI is not considered a quality issue. BOFI cannot raise capital cheap. In fact the reason the management desperately goes after short-sellers is because they need high stock price to raise capital cheaply. If they issue shares at $15 to $17, the capital raise will pretty much dilute any EPS growth you will see for many years and will cause the share price to go down even faster.
You would then consider pairing a short of this with a long of C?
Absolutely.
You would then consider pairing a short of this with a long of C?
Absolutely.
Then do it. 
If you don’t want to put up the capital or share anything personal you could always implement something similar in CAPS. Track the performance and see how it goes. Maybe it works or maybe it doesn’t. Though being accountable is the only way to learn from our past to make us better in the future.
If you don’t want to put up the capital or share anything personal you could always implement something similar in CAPS. Track the performance and see how it goes. Maybe it works or maybe it doesn’t. Though being accountable is the only way to learn from our past to make us better in the future
I never understood CAPS. There is no real money for anyone to express their opinion. Your comment about 'accountable" is pretty funny. Somehow an CAPS is accountable and the posts on these boards are not accountable. Pretty naive thinking.
I post to share my thoughts and get response. But your post actually makes me think what am I getting out of these posts or some of the boards. Something to chew on. Thanks for that.
I post to share my thoughts and get response. But your post actually makes me think what am I getting out of these posts or some of the boards. Something to chew on. Thanks for that.
The last few weeks it seems as if you went to the zoo with a sharp stick intent on poking every single animal in the zoo just to see which ones bite back.
Don’t worry the feeling is mutual…
The last few weeks it seems as if you went to the zoo with a sharp stick intent on poking every single animal in the zoo just to see which ones bite back.
I am sorry you feel that way. My comment was not actually intended at your post. Frankly, your post just triggered a thought but I don’t think you said anything that I consider wrong, unacceptable or offensive, etc.
I can assure you I have no ill feeling towards you for that matter anyone at all. If I am not happy with a post I just express and move on.
My comment was something I read on CMFAnurag’s post about how his time is worth about $400 an hour. I am thinking about that not just about my time spend on posts but various other activities related to investing in general. I have been noticing bulk of my investments and profits do not take that much time.
For ex: No one really paid attention to my hedge trade idea of going long BAC vs going short WFC. This particular idea where the risk is really low and risk adjusted return is fantastic, you could bet larger amount. This trade worked so well. The sad part is folks are many fold interested in other things.
On the other hand the comments about BOFI if you paid attention, is not that I am poking any bear, but actually a reflection of folk’s anxity on BOFI investment. There is another Rule Breaker suggestion FitBit, which also has a significant short interest and doing okay. I wonder why there is not much talk about short interest there? Is it because there are no silly articles in SA to bash about? The simple point I raised like why you think those bloggers in SA are responsible or represent the short thesis? What are we not looking? overlooking?
No one seems to be interested in that rather they are interested in coming after the person who raises question. Even your comment has just made a leap of assumption and go bask and re-read your comment about pair trade on citi vs BOFI. It is not an non-personal investment comment.
7/29 short interest was 24,529,686 shares with 23 days to cover
8/15 short interest was 23,038,062 shares with 13 days to cover - Average volume way up.
8/31 short interest was 23,375,947 shares with 14 days to cover.
9/15 short interest was 22,562,288 with 35 days to cover!
lowest short interest value since November. We’ll see if the upward pressure continues while the shorts close up shop.
Next short interest update is after market on 10/11. Cheers to seeing this one get squeezed.
Interesting that days to cover has gone up to 35 days. Just to make sure I am understanding correctly, Does this mean average volume has gone down?
Basically more people are “holding onto” their shares?
Thanks for the update!
Kevin
Basically more people are “holding onto” their shares?
Could also be looked at as more people are unwilling to pay the current price to buy shares.
There are two sides to every trade.
