James Royal is the author of a new book called The Zen Of Thrift Conversions. If the concept is new to you, it is very cool so take note. If you’re familiar with the concept (like I was) but didn’t really have success with it this interview is a must watch.
Or actually, the book is a must read.
ZOTI is essentially a guidebook for thrift investing, a relatively low-risk/decent reward investment strategy. It revolves around investing in community banks that are entering the public markets through an arcane process. It sounds difficult at first but it’s actually fairly straightforward. The process is so different from the standard IPO process that it’s much likelier you’ll find a bargain this week.
James takes us through the multi-year process step by step.
We also discuss the key risks and the activists to follow in this space. Following these people can really accelerate the process of something good happening to this undervalued asset class.
After reading his book and this conversation, I’m definitely going to try this tactic again. James also included a list of thrift activists and talks about their tenacity and what they go through to get management to do the right thing. In the end, we also go over several thrifts he currently finds highly attractive.
Opportunities that James talks about include Eastern Bankshares (EBC), TFS Financial Corporation (TFSL), which is one of his favorite ideas, First Financial Northwest, Inc. (FFNW), and HarborOne Bancorp, Inc. (HONE).
Because we discuss the generally unimpressive financials of these thrifts a bit, I’ve pulled up some relevant statistics from Seeking Alpha data for these names. I’ve also pulled up the data for JPMorgan (JPM) which is often considered a gold standard among the majors and the beaten-down, out-of-favor bank that seems to stumble from one scandal into the next, called Wells Fargo (WFC).
Net income margin is interesting to look at. You’ll see the power of scale and being well run there. Returns on assets aren’t all that different, except Wells Fargo’s really is underperforming, but the returns on equity suddenly look amazing for JPMorgan. And finally, book value is an important metric. It’s easy to see how it’s really accretive to JPMorgan to buy smaller banks. And that sort of holds throughout the entire food chain.
The valuation on Wells Fargo is illustrative because it currently is very much out of favor, after a number of missteps, and it’s still trading at a book value equal to these small banks that don’t have all the same baggage.
Bram de Haas writes the Special Situation Report. He looks at special situations like spin-offs, share repurchases, rights offerings and a lot of M&A events. If you are in a good mood follow him on Twitter here or reach out through email at firstname.lastname@example.org.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.