Better Sleep, Better Returns

One of the most successful investing approaches over the past 40 years or so has been thrift conversions. Investors form Peter Lynch to Seth Klarman have used this secret to find winning stocks and earn impressive returns and most investors are not aware or just not interested in the steady, boring way of making a ton of money in the stock market. Consider the fact that according to a Barrons article published in 2010 the SNL Thrift MHC Index returned 188% during the lost decade in which the market returned less than 10% cumulatively. Historically 75% of these newly converted thrifts have been taken over 5 years or less after the IPO. Although the number of deals has declined over the years they are still being done. In 2013 for example we saw 10 thrift conversion IPOs priced. So far in 2014 we have seen 7 deals completed. The very nature of the thrift conversion tends to create a well-capitalized bank with a solid loan portfolio that trades at a steep discount to book value. The new capital taken in via the offering adds to the book value of the institution and creates extraordinary value for shareholders. Smart investors who buy the shares will still well below book value should see spectacular long term gains from these boring little conservative bank stocks. Several of the 2013 thrift conversions are still trading at very attractive prices. Prudential Bancorp (PBIP) is a small bank in the Philadelphia area. They have 7 branches with about 514 million in assets in the region. The loan portfolio is primarily 1 to 3 family housing loans and has very little exposure to higher risk loans like home equity and construction loans. Nonperforming assets are just 1.43% of total assets. Post offering the equity to asset ratio is over 17 so the bank is very well capitalized right now. While there is nothing particularly exciting about the bank the fact that you can buy a well-funded conservative bank at such a low price to book value ratio should be of great interest to long term value oriented investors. Charter Financial (CHFN) is another bank that did a conversion offering in 2013 and still trades at bargain prices. The bank has 16 branches in Alabama, Georgia and the Florida Panhandle with t about$ 1 billion in total assets. The bank is more engaged in the commercial lending arena as about half of the banks loans are commercial real estate related. The bank has a strong portfolio as nonperforming assets not covered by loss sharing agreements at 0.59% of total non-covered assets right now. They have plenty of capital with an equity to asset ratio of more than 19 and have been using their excess capital to buy back stock. They just finished a buyback program and immediately announced another for approximately 10% of the outstanding shares. The stock is bargain priced as well, trading at just 84% of book value. Westbury Bank (WBB) is a little bank with 12 branches in Wisconsin. The have assets of about $529 million and nonperforming assets are just 1.05% of total assets. The equity to assets ratio is 12.5 so while not a wildly over capitalized as some other banks they do have plenty of capital. The have avoided the riskier lending activity with more than 80% of loans spread out among single family, multifamily and commercial real estate loans. Westbury also just announced a buyback program and will be looking to repurchase as almost 5% of the outstanding shares. With the stock trading at just 74% of book value they are getting a bargain. Insiders have also been buying stock in the bank in anticipation of higher prices in the years ahead. Thrift conversion have been one of the more profitable segments of the stock market. While they do not offering an exciting story like tech or medical stock they are cheap and have a margin of safety that should leading to both market beating returns and sound sleep no matter what the market does form day to day.