A little adventure can take your portfolio a long way even with the slightest of risks.
Last week, I ventured to New Orleans for the Gulf South Bank Conference.
I spent some time wandering around the town, eating entirely too much, and doing my best to help lower the excess bourbon supply the day before the event.
I realize this sounds boring to others, but I’m a massive fan of bank stocks and had as much fun in the meetings as I did wandering around the Crescent City over the weekend.
What I learned can make us a lot of money over the next few years.
The consensus among the gathering was that the current state of banking is pretty damn good.
Credit conditions remain excellent as the economy stays positive and the Fed stays on the sidelines.
Several bankers told me that the Fed’s move last year to raise interest rates had pushed us to the brink of a recession, but now that they’ve reversed course, it should be clear seas and smooth sailing for the economy and the banks.
So here’s exactly why one particular bank stock is worth every penny of your investment.
One Caveat Before the Money Pours In
The biggest concern I heard expressed was one that I have mentioned several times.
As bankers became risk-averse often by the insistence of regulators, a vacuum formed in credit markets after the last credit crisis.
Hedge funds, business development companies, and other non-bank lenders rushed to fill the void and make the riskier loans for young companies and leveraged buyouts.
Some of the firms are pretty good at this type of lending.
I think the non-bank lenders associated with large private-equity firms like Apollo Global Management (NYSE: APO), Kohlberg Kravis and Roberts Inc. (KKR), and The Blackstone Group (NYSE: BX) have the type of in-depth knowledge with risk-taking and lending that gives them an advantage over their competitors.
However, there are a lot of new entries into the business, and I’m not sure that they have an edge or even the ability to put together sensible loan portfolios.
If we see a problem in the financial system, it will come from these inexperienced lenders in risky markets making stupid loans, not the banking industry.
Bankers have learned their lesson for the most part, and should they be inclined to forget this history, the regulators like the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) are happy to remind them.
Follow the Best Banker on the Planet with Top Return of Assets
Anytime John Allison of Home Bancshares Inc. (NASDAQ: HOMB) speaks at one of these events, he becomes the story of the day, and his talk this week at Gulf South was no exception.
I’ve had the pleasure of knowing John for several years, and he’s near or at the top of my “best bankers on the planet” list.
He describes himself as a businessman whose business just happens to be banking, and he runs the bank as a business to benefit the shareholders. And since he and his family are the largest shareholders of the banks, it just makes sense.
John talked about the growth potential for the bank with its Centennial Commercial Finance Group as a chief driver of growth.
CCFG is a lending organization that focuses on commercial real estate as well as commercial and industrial loans.
Home Bancshares bought the New York-based operations in a deal orchestrated by the FDIC back in 2015, and it has been a roaring success.
According to John Allison’s presentation, the company has never had a bad loan or a loss due to its conservative approach to this type of commercial lending.
Most of its loans are done at about a 60% loan value, so it becomes very difficult for the bank to take a loss.
Allison and his team run the bank with ruthless efficiency, and as a result, it has one of the highest returns on assets (ROA) in the industry.
Over the past year, it’s earned an ROA of over 2%, putting it on the top five list of all banks in the United States.
Mr. Allison and his team’s attention to detail has driven earnings by almost 25% a year over the past five years, and they expect the good times to continue to roll.
In spite of its incredible track record, the bank saw its stock price punished in the fourth-quarter sell-off along with all the other banks.
Home Bancshares is down more than 20% over the past year, and the bank’s management team sees it as a buying opportunity.
Starting in 2018 and continuing into the first quarter of the year, they’ve repurchased about 5% of the stocks and will continue to repurchase shares as long as it trades at what they see as a bargain price.
We should view it the same way.
How One Shared Perspective Can More Than Double Your Earnings
This is a bank on a mission that has grown from a one-branch bank with $25 million in assets to a $15 billion bank with 150 branches in the Southeastern United States.
It’s not done growing either.
John talked about his desire to buy more banks in Florida while expanding into the Carolinas and Texas if he can find a deal at the right price.
Given his track record of deal-making, I’m pretty confident that he’ll find the deals he needs to keep growing.
Now, after the 4th-quarter carnage on banks stocks, Home Bancshares trades at just 11 times earnings right now.
Given the fantastic track record of growing sales and profits, the share should fetch a multiple of 20 or higher.
At some point, the market will wake up to the incredible earnings power of John Allison and his team and properly value this company.
When that happens – and I certainly think it’s a when and not an if – the stock is going to double or more from the current level.
Investors looking for a low-risk opportunity to at least double their money should hop onto the John Allison bandwagon and keep buying shares of Home Bancshares until Wall Street wakes up to one of the best growth stories in the market today.
— Tim Melvin
Source: Money Morning