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Take 5 minutes. Read this article. Add the voice of Fitch, a major ratings agency, to the growing chorus of analysts, investors, Bank executives, regulators and even Fed offciials telling you that small banks have to merge to surivive. The average price book value for a small bank merger right now is 1.35. Our current buy list has an average price to book value of about 83%. They are all financially solid and most have at least one activist investor as a major shareholder.

Read, ponder, think, join. The price goes up from the current $399 a year to $1000 on Ocotober 1st. Those who joined now will be locked in a the current rate for the life of your subscription.

Fitch Ratings has completed a peer review of five rated large community banks. The following banks were reviewed as part of the Community Banks Group: Central Pacific Financial Corp. (CPF), Community Bank System, Inc. (CBU), CVB Financial Corp. (CVBF), First Midwest Bancorp, Inc. (FMBI) and Independent Bank Corp. (INDB).

Fitch revised ratings and/or Outlooks for CPF and CBU. All other ratings and Outlooks were affirmed and maintained respectively for the remaining banks. A complete list of rating actions follows at the end of this release. Furthermore, please see the separate and related press releases put out today for each bank listed above.

CPF’s Long-Term Issuer Default Rating (L-T IDR) and Viability Rating (VR) were affirmed at ‘BB+/bb+’. Fitch also affirmed CPF’s Short-term IDR (S-T IDR) at ‘B’. The Rating Outlook was revised to Positive from Stable. The rating actions reflect continued significant asset quality improvement, strong reserves and the recent executed succession plan that should keep the company focused on its core competencies within its primary operating market of Hawaii.

CBU’s L-T IDR and VR were upgraded to ‘BBB+/bbb+’ from ‘BBB/bbb’. Fitch also affirmed CBU’s Short-term IDR (S-T IDR) at ‘F2’. The Rating Outlook remains Stable. The rating actions reflect CBU’s consistently strong operating performance over time that aligns with a higher rating. Fitch observes that the company has maintained and stayed true to profitable and conservative, long-term strategies evidenced by low volatility in earnings performance and asset quality. CBU has some of the strongest returns and asset quality in Fitch’s rated universe over multiple economic and rate cycles.

Fitch’s Community Bank Peer Group is mostly defined by banks with less than $10 billion in assets that typically operate in a limited number of markets and, in general, are conservative, traditional on balance-sheet lenders for local communities.

Community banks typically lag larger peer groups by geographic footprint and product/revenue diversification. As such, community banks are more susceptible to idiosyncratic risks such as geographic or single name concentrations. The majority of institutions within this group have retail branch networks which reside in contiguously located counties and are typically in just two to three states. Fitch believes these factors limit the group’s ratings to ‘BBB+’ and below.

Those institutions within Fitch’s community bank group generally have homogenous business strategies. The institutions are relatively more reliant on spread income from loans and investments. On average, non-interest income continues to represent less than 30% of total revenues within the community bank group while larger banks generate over 40% of revenue from non-interest income. With limited opportunity to improve fee-based income in the near term, Fitch expects that community banks will continue to face core earnings headwinds into 2016. Through the first half of 2015, the average community bank ROA within Fitch’s rated universe was 100bps up from 90bps last year but still lagging the average ROA for large regionals.

Fitch continues to believe that regulatory exhaustion and an inability to improve returns on equity have led many banks with assets under $1 billion to sell, particularly as transaction multiples have improved and the appetite for core deposits has increased in the current low rate environment. Fitch expects community bank deals to continue to outpace those deals of larger institutions.

However, Fitch also believes that there could be a marginal increase in deal activity involving larger banks (over $50 billion in assets) acquiring those that are nearing the $10 billion asset mark, such as the August 2015 acquisition announcement between BB&T Corp. and National Penn Bancshares.

Increased regulatory scrutiny — including more complex, costly stress testing and supervision by the Consumer Financial Protection Bureau – for banks that cross the $10 billion asset mark are forcing management teams and board directors to make strategic decisions about the economics of crossing the threshold. Banks also become subject to the Durbin Amendment when crossing over $10 billion in assets which limits debit interchange fees, potentially reducing fee income meaningfully.

These headwinds have been instrumental in shaping the strategies of many banks who are left with a couple of choices: either slow growth ahead of surpassing $10 billion in assets in order to find a buyer or make an acquisition themselves to move meaningfully beyond $10 billion which presents its own integration and strategic challenges. Fitch believes that few banks will make the decision to breach the threshold through measured, organic growth given the profitability challenges that would be the likely result. Within Fitch’s rated universe, FMBI, CBU and CVBF are the closest to crossing over $10 billion.

Fitch observes that asset quality continues to improve within the community banks group albeit at a much slower pace than in recent years. Fitch anticipates further asset quality improvement to be nominal as nonperforming loan (NPL) reductions level off and credit begins to normalize across the industry.

Fitch remains concerned about the smaller banks’ exposure to C&I lending, as this generally represents a relatively new asset class and some institutions may not have the requisite back-office infrastructure or experience to adequately identify, monitor and mitigate any ensuing credit risk.

Fitch observes that community banks have historically focused on real estate lending which has a more favourable credit loss history compared to C&I over the long-term. Fitch observes that the long-term NCO rate for C&I lending is between 90 and 100 bps based on FDIC data. This compares unfavourably to almost all real estate lending classes outside of construction and development. However, those community banks that were hit hard by being overly concentrated in commercial real estate have felt the need to diversify loan portfolios. While Fitch generally views loan portfolio diversification (by both asset class and geography) a positive for banks, growth C&I lending is viewed with caution, especially given current interest rate levels and the amount of competition surrounding this lending space.

Fitch generally believes that the community bank group is reasonably capitalized relative to its range of ratings. However, Fitch will continue to monitor and potentially take action on banks that manage capital at more aggressive levels in light of relatively weak earnings profiles and above average loan growth.

The community bank group’s funding profile is considered a rating strength providing a stable source of liquidity as core deposits are stable and sticky. Moreover, Fitch recognizes these banks’ ability to borrow from the Federal Home Loan Banks and the Federal Reserve Discount Window as funding advantages relative to nonbank financial institutions. Although community banks are not typically price leaders for either loans or deposits, most hold good market positions in their respective footprints. Nonetheless, Fitch believes that the groups’ market share positions could be challenged should loan demand pick and competition for deposits intensifies, particularly under a rising rate scenario and with larger banks needing to comply with the liquidity coverage ratio (LCR).

For further information regarding Fitch’s Large Community Bank peer group, please see the special report published today titled ‘U.S. Banks: Periodic Large Community Bank Peer Review (Strategic Risks Elevated as Asset Size Threshold Nears)’ by clicking on the link below.

Additional information is available on www.fitchratings.com.

U.S. Banks: Periodic Large Community Bank Peer Review (Strategic Risks Elevated as Asset Size Threshold Nears)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871087

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM’. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

The Case for Community Banks

Orginally published on RealMoney.com

I have been preaching the small-bank gospel for some time now. I first discovered this sector back in the 1990s as a broker when I realized that one older fellow at my new firm was making a ton of money in spite of the fact that he really didn’t work very much. He slid into the office at 9:25 every day, was one of the last faithful practitioners of the three-martini lunch and was never late for happy hour in the almost 20 years I worked with him. I spent a little time talking with him, picked up a few super-sized bar tabs and got the secret of his low-work, high-pay approach to life.

Our firm made a market in every small bank in the Mid-Atlantic region, and he was socially connected to all the developers, Realtors and bankers in town. For years, my friend had handled all their buying and selling of the small banks in the area and had become the go-to guy for community bank stocks.

As I investigated the little banks we traded for our customers, I realized this was indeed a gold mine. They all traded below book value in the aftermath of the savings-and-loan crisis in spite of being fairly healthy banks. I added small banks to my repertoire and the rest is history. It has been my favorite investment sector and I have made more money for myself and others in small banks than in any other sector over my career.

I am familiar with all the ridiculous objections to investing in small banks. They are illiquid and hard to trade is one of the biggest objections I here. They are hard to buy and can be even harder to sell. Of course, Roger Ibbotson’s study has proven that illiquid, undervalued stocks are far more profitable than large, liquid-growth stocks, but some people just seem to need the action.

I happen to think the illiquidity is one of the main reasons people do so well with these stocks. Large liquid stocks are like a coffee can full of money that you can dip into any time you choose. You can even move it to another can several times a day but you will drop some coins each time you do. Illiquid community banks are a stack of money in a safe with a 19-digit combination wrapped in barbed wire. As a bonus, the money is growing at a decent rate and every once in a while someone will want pay you a $1.50 for the $1 bills you have in there. It is hard to get the money out and takes time, forethought and preparation. As a result, you tend to leave it in there and let time and the long-term bank consolidation trend do their job.

The other complaint is that they just are not exciting. That is very true. They do not trade a lot. They are not in the headlines every day and no one at the cocktail party wants to talk about your position in Hamilton Bancshares (HBK) or ASB Bancorp (ASBB). They are not shiny or exciting, they have no drugs in clinical trials that cure nose condensation and only cause minor anal leakage and heart attacks, you can’t wear their products on your wrist like Dick Tracy and they don’t even have a decent search engine. They take deposits and make loans and that’s about it. They are very boring and they trade like bunny rabbits. They sit still for long periods of time and only jump when things like dividend increases and new buybacks are announced. Of course, when a 13D is filed by an activist or a takeover offer is made, they take off like a magic money bunny to bring you outsized profits.

The long-term math of small-bank stocks is exciting. If we buy them right, math and time are ever in our favor. As the economy just sort of grinds along, the book value of these banks is growing every year. Community bank earnings grew by 12% year over year, according to the FDIC quarterly report released last week. A lot of that will be reinvested and grow the value of the bank. As time goes by, the premium larger banks are willing to pay to buy a smaller one will grow as well. Since 2011, the growth rate of the takeover premium has increased by about 5.5% and is now at 1.35x book value.

Let’s put the math to work for us. Let’s say we buy a bank stock with a $10 book value and we pay my preferred price of 85% of book value. Over the next three years, management grows the book value by reinvesting profits and buying back stock by about 7% a year. That’s what Chris Marinac of FIG Partners, a community bank research and trading firm, tells me he thinks community banks will grow in book value over the next few years on average. Let’s say the takeover premium continues to grow by 5.5% a year, and at the end of three years a larger bank buys your bank for 1.6x book value. You cash out with an annualized return of 33.01%. If the takeover premium just stays the same, your return slips all the way to just 24.85% a year.

What if management doesn’t perform and book value just stays the same? Assuming the takeover multiple grows as expected, buying the bank at even 90% of book value and then selling to a larger bank in three years, your return is a paltry 14.47% a year. That’s only a little more than 40% better than the long-term return of the markets and 95% or so of all money managers and hedge funds, so why would you bother? After all, according to the research firm Dalbar, you could mirror the average individual investor’s account, chase hot stocks and earn less than 3% annually without ever owning these boring little banks no one ever heard of or cares about.

We are in the early stages of a long bank consolidation wave. Regulatory costs are soaring as a result of post-credit crisis legislation. Technology costs for things like cybersecurity and mobile banking will also continue to grow. It is harder for smaller banks to go it alone, so they will be looking for merger partners. Larger banks will be looking to buy growth in a low-growth economy. There are larger pools of banks that will need to sell and an equally larger pool of banks that look to buy to grow assets and earnings.

Investors who buy smaller banks at a discount to book value and sell at a premium over a few years are going to make an enormous amount of money. They are not liquid and they are not exciting. But they can make you rich if you are disciplined and patient.

Alligators, Squirrels and Chicken and Dumplings

The crack staff and I were out our morning walk today and as usual we saw a couple of alligators. This neighborhood has literally dozens of lakes and ponds so gators are a common sight either swimming around or even sunning themselves on the banks. As long as you don’t do anything stupid like walk up to them or let your pet charge them off leash they are no threat and I am a big fan of the alligator. Watching the gator skim around the pond this morning it occurred to me that investors should quit worrying about bulls and bears and think of the humble gator when investing in stocks.
gatornap

Alligators may be ferocious beasts but they really are not much of a hunter. They just sort of hang around waiting for something delicious to get too close. I like to look for alligator markets where I can just hang around and wait for stock to be so cheap I can buy good companies at great prices and then slumber on the bank while time and compounding do all the work for me. The weeks after the 1987 crash were an alligator market. So was the internet bust. Of course 2008 and 2009 were wonderful market for alligator investors. You could find safe and cheap stocks by the bucketful and over the several years following the profits were enormous as the market recovered and the battered became the beautiful once again.

There is a reason Warren Buffett, Andy Beal, and Charlie Munger are billionaires. It is the same reason that Hetty Green was the richest woman in the world and Mr. Womack never lost money in the stock market. They are all alligator investors. They do not do much until there is something compelling and exceptional to do. They do not care what the moving average is or where the next Fibonacci level is. They are not concerned about what the volume was today. In fact they do not even care if the market was open today if they do not feel like there is a huge opportunity to buy things cheaply.

I have said repeatedly that we can have a discussion about this market being fairly valued or overvalued but you cannot even begin to discuss the market being cheap. It is much more a squirrel market than an alligator market. You have to do a lot of searching and probing into various holes and pockets of the market to find any real value. There is a lot of competition for the few ideas that are out there and there is nothing easy about finding deep value stocks with high recovery potential.

Unless of course you do what the smart alligators do when their current pond is fished out. They find a pond with lots of fish and go hang out there. That pond today is the small regional and community banks. We can still find plenty of banks at 90, 80 and even 70% of tangible book value that have sound loan portfolios and plenty of capital. Most of them have at least one activist or smart money bank investors as shareholders. Our mix of bank stocks is doing very well this year and there is still enormous upside ahead.

Don’t forget that in order to keep our own success from killing our returns we are raising the price on the regular Banking on Profits service on October 1. If you are not a member you have until then to become a member at the current $399 price. As a bonus that price will be locked in for future renewals. You also will get the monthly Banking on Profit free as part of you membership. You can click here to sign up at the current price

Oil continues to be on everyone’s minds. We own in oil stocks and feel no need to sell the ones we have as oil prices in 2020 are much more important to us that they close today. As I said yesterday I think the Saudis are all in on the market share gambit and unless other nations cut their production oil is going to be a slippery market unless prices fall closer to the breakeven $27 a barrel or we see more hedges roll off in the US unconventional fields and production declines as result of bankruptcy and financial distress among smaller producers. Right now scenario B looks far more likely to me. Of courses with energy there is always a knuckle baller in the bullpen any geopolitical event that disrupted production or supply would change everything.

I am not opposed to buying more energy but right now while we can find plenty of cheap we cannot find much safe. Those that qualify on both counts are in the portfolio and we will hold them. If price do fall closer to that $27 mark we will buy more. There bargains among the carnage but not many of them are financially strong. Those we find we will buy but so far we are not finding much new in the energy patch.

Right now everyone is holding the breath to see what Janet Yellen is going to say at her 5:00 speech. I am going to go take a little nap until the chicken and dumplings are done.

Cheers,

Tim

When investing forget the bulls and bears. Be an

8 Days left to join Banking on Profts at the current price.

I have said in my last few blog posts and videos that as of the end of the month I am raising the price of the Banking on Profits service to $1000. Please know that this is not a marketing ploy. We need to limit the membership to those who are serious about investing in the trade of the decade. I should really change the catch phrase to opportunity for a lifetime because that is what it has been for me. I have been investing in little banks for almost 25 years now and it has been very successful to say the least.

I have shared with numbers with you. I closed out another position today booking gains of over 95% on Sussex Bancorp and our average gain in closed positions is over 60%. We have participated in 15 takeovers so far. 2 of our 78 open positions are down and the biggest loss is a whopping 1.82%.The other one is down .24%. We are up 10.52% in 2015.Over the last year we are up 15.05% compared to the slight decline in the S&P 500. The 30 stock current buy list has an average price to book value below 85%, above average equity levels and below average nonperforming assets ratios. Most have an actviist investor involved in the stock. Investing in small banks works and its just going to keep getting better.

Consider this from a recent Reuters article. “Consolidation among U.S. banks, particularly capital-squeezed small- and mid-cap lenders, is set to rise in the next year or two due to persistently low interest rates, RBC banking analyst Gerard Cassidy said. The increase in deal activity will also be driven by expense pressure from the new regulatory environment, Cassidy wrote in a note to clients. U.S. regional banks have long complained that capital reforms, intended to rein in the excesses of bigger banks, have placed undue burdens on smaller lenders. “

More takeovers means more profits for small bank stock investors. The consolidation wave is maybe in the bottom of the second inning so far. This is going to go on for years and enormous amounts of money will be made. The banks strong enough to not be taken over will be compounding machines generating strong earnings and dividend growth that drives the stock price higher year after year. This is real, It is happening now and its going to keep happening for years. This is your last chance to join Bnaking on Profits at this price. It goes up in 8 days.

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You also get the Monthly Banking on Profits Free included at no additional charge. This monthly newsletter has market and sector commentary, statistical information and focus stock reports. We also track 13D and insider activity for the sector each month and every quarter I do a rundown of 13F filings to see what stocks the activists and bank stock specialists are buying

We get 4 1/2 stars out of 5 from our current members. Here is some of what they have to say:

Terrific newsletter and recommendations. Helps me sleep at night! Love the low volatility and long-term approach of a large community bank portfolio. I have abandoned an overly active trading style and love to get back to basics.

I like Tim’s viewpoint. As a former analyst at a regional bank, I know Tim examines the important factors: Net Interest Margin, Efficiency Ratio (aka “Erosion”), Loan Loss Reserves, Return on Assets, Equity capital, and (most important!) Price to Book Value. I am confident in all his recommendations.

Tim Melvin is an expert in identifying deep value investment opportunities, and the banking sector provides the best near term potential for outsized gains since the savings and loan debacle. Melvin has the track record from that time, and he will not disappoint. I cannot believe Tim is willing to share his bounty of knowledge with us. If you are serious about building a solid, long term portfolio of winners, you will want to subscribe to Banking on Profit

I’ve been following Tim Melvin on Real Money Pro for years, and his stock suggestions have made me a lot of money. I’m a value investor and Tim’s style is perfect for me. Based on my great results from him, I’m completely sold on his thoughts on small banks being the Trade of the Decade, as he calls it. I messaged him on whether or not I should sell some stock (that he recommended) that was up a good amount, and he messaged me his advice! Where the hell else are you going to get a market pro to give you personal advice!? Subscribe to this service. You will not be sorry. His advice paid for the subscription several times over.

We have the numbers. The analyst, bankers and even the regulators are telling you the same thing I am saying. It is not hype. It real and you should not miss out on this incredible long term opportunity.

You have 8 days to join Banking on Profits. As a bonus all current members including those who join in the next 8 days are locked in at this $399 a year rate for life.
Do yourself and your long term investing results a favor. Join us at Banking on Profits today

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Tim

Frustration, Patience and Time

I will say it again. Janet Yellen has one of the worst jobs in the world and its not going to get any better any time soon. No matter how much they may want to “normalize” rates the economy just refuses to give them the justification for a rate hike. No matter what course she tries to steer or what she says she will be vilified by about half the folks observing. The economy is better but not good and now as the fed pointed out in the statement” “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” The only problem with that statement is that it may not be just the near term. The growing refugee crisis in Europe is not going to help that economy get back ion solid footing. China has decided to show weaker numbers and that won’t help us make our numbers look any better. A few months back Louis Navelllier told me that he doesn’t think the Fed will be able to raise rates in his lifetime and its starting to look like he may be correct.

I keep hearing the pundits and economists tell me everything is getter better and everything is on track. While not denying that things are getting a little better a look at just a few recetn headlines will give you a better idea of what the Fed is up against. Here are just a few recent economic headlines :
Philly Fed factory activity contracts unexpectedly in September

New York State factory activity declines for second month

Manufacturing Survey Shows Slowing in August

U.S. Housing Starts Fall 3% in August

The Morning Ledger: U.S. Employment Growth Slowed In August

We remain firmly mired in a better than it was but not really very good economy. Given that and what we are seeing in earnings and revenues aggressive buying of stocks today means you are voting that low rates will continue to spur buyback and M&A activity. You may be right for a bit but you cannot make the case that stocks are a tremendous bargain so you are paying a premium price for hope of prolonged Fed supported financial engineering. I was hoping for a rate hike that PO’d the market a bit and we got the kind of sell off that allows us to talk about good companies at great prices but we didn’t get it. I will continue to kick the rocks and look for bargains but outside of community banks there is just not a lot to do. It will eventually happen but unitl then we will sit here on our pile of cash and be frustratingly patient.

On the bright side from my point of view there is going to be a very similar conversations round a lot of community bank board tables in the next few weeks. It is going to be along the lines of “ I thought we could stick this thing out until rates moved higher but it does not look like that’s going to happen now. We need to revisit the idea of staying independent.” This is especially going to be true of those institutions where the board and CEO are older and just plan tired of the very difficult regulatory environment they find themselves in today. Taking the time to review community banks trading below book value with an average board ago over 60 and an activist pushing for a sale should be a very lucrative enterprise for the next year. Of course we have already done that and put it to work for Banking on Profits subscribers. It is a tad pricey at $40 for the paperback but I highly recommend taking the time to read it.

As a thought exercise after reading it I spent some time thinking about which industries might see the type of spending over the next 30 years that might create the type of sustained growth that could drive stocks up to 100 times the current price. I came up with small banks as a result of continued roll up acquisitions over time. It is not heard of for shareholders to see their original banks taken over several times in a row by ever larger institutions and I figure 6 takeovers should produce something like 100 to 1 returns over time; cyber security because that is just going to be the new and lasting form of criminality and warfare; pollution control because more people means more trash and carbon emissions, and the need for water around the world. I also think that alternative energy will be a hunting ground for these stocks as that industry is going to grow steadily but I really do not see any companies yet that I think can do it. It will be the companies that achieve the technology breakthroughs in storage and transmission that achieve those gains and I do not know enough about the industry to identify potential winners. Now we just have to get the right price on some of these stocks so we can sit tight for a few decades! If anyone else does this little exercise I would love to hear your thoughts.
Thats all for this week

Cheers,

Tim
Ps If we practice the art of buying right and sitting tight then
https://www.youtube.com/watch?v=wbMWdIjArg0

David, Seth, Plato and Merle

Tonight the NFL kicks off and this brings a real dilemma. Being a Baltimore boy from way back I am still a Ravens fan but I would love to have an instate team to cheer for during the year as well. The problem is that none of the Florida teams are very good and worse, they have been boring to watch. The Jaguars are just out as I am still trying to figure out what the hell a Jaguar has to do with Florida. Tampa Bay has some appeal as anytime you get to dress in pirate themed gear it’s a party but they have been horrible and I am not a big fan of famous Jameis either. I lean towards the Dolphins in honor of Kiick Csonka and Griese , to say nothing of the great Don Shula, but the wife thinks they have sissy uniforms. For now I will stick with Baltimore and sneak peaks at the Miami games to see if the team is good enough to watch this year. Which of course means that for tonight I am a big fan of deflated balls and the New England Patriots as anytime the Steelers lose, it’s a win for the Purple and Black.

The big new this week is that David Tepper has turned somewhat bearish on stocks. While lots of folks have done that over the last year or so Tepper has been unabashedly bullish until now and has made a ton of money loading up on stocks. He told CNBC this week that “I’m not as bullish as I could be because I have problems with earnings growth, problems with multiples. I can’t really call myself a bull.” He added that he would take some money off the table if he was fully invested and that being flat was not a bad idea in the current market conditions. He also said that he would be a buyer if the market corrected by 20% or more.

That has been my position for some time. The market simply is not cheap right now and its difficult to find safe and cheap ideas. To further complicate matters the fundamentals of many companies have been slipping as the economy remains in slow growth mode and commodity prices are falling.This week we sold a bunch of stocks that while they may be cheap, the margin of safety had deteriorated substantially over the past few quarters. We need a steep correction in order for the type of deep value opportunities we look for are readily available.

An interesting question that comes up a lot is when to start buying as the market is falling. The answer is of course you do not know and you have to buy bargains with expectation that they will keep falling before recovering. Back in 2009 Seth Klarman explained the process in his shareholder letter saying” While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. Moreover, the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better.”

He added some advice that rings particularly true today. He cautioned investors that “Especially in today’s difficult environment, money managers must keep firmly in mind that the only things they really can control are their investment philosophy, investment process, and the nature of their client base. Controlling your process is absolutely crucial to long-term investment success in any market environment. Investing is hard enough. Success virtually requires that a process be in place that enables intellectual honesty, rigor, creativity, and integrity.” We have a process that I know works over time. I know that it underperforms as we near a market top. I know that the returns from the deep value approach are quite lumpy with the lions of the returns are earned following a steep collapse in stock prices. I know that deep value has been lagging since about 2013 (you know- right when I started the Deep Letter in yet another example of my excellent timing skills!) and that it won’t last forever. Staying the course has always worked out in my favor and I expect it will this time as well.

Of course the underperformance of the deep value portfolio has been offset by the outperformance in the banking on profits portfolio. We started that letter at the same time and in two years we have had 79 stock picks with 76 of them generating positive returns and the largest individual loser falling a whopping 2%. We are handily beating the market and are up more than 9% year to date while the market is down and the portfolio return over the past year is about 50% higher than the community bank stock ETF (QABA). We are adding more features to the letter in the near future and will be raising the price to reflect the fact that we have proven the point about investing in community bank stocks based on our criteria. We have closed 9 positions with an average gain of 56% so far. It works and it works extraordinarily well.

I am also aware that I have to limit the number of subscribers if we are going to continue to work with these very small illiquid names. In order to grow what I earn from the banking on Profits Service and justify the time and effort put into making Banking on Profits the best bank stock service available, we have to go back to the original price point. That was $999 but I am just going to ignore the marketing tricks and says its $1000 a year starting October 1, 2015. Current subscribers have been early adopters of the service and we will lock them in at the current $399 price for life as a token of my thanks for helping get Banking on Profits launched these past two years.

If you have been on the fence or just procrastinating that offer remains open to you for the rest of the month. If you sign up this month you are locked in at the $399 point. If you give someone a gift subscription to Banking on Profits they will be locked in at $399 for life. After October 1 the price goes up and we will not be discounting the regular service. The monthly newsletter will be going up to $199 as we are adding content to that service as well but you will continue to get that free for the life of your subscription. That’s a pretty good deal on a highly specialized research and investment service that has been proven to provide market beating returns.

Plato said it best when he said “The beginning is the most important part of the work.” Click here and lock in the current price on Banking on Profits for the life of your membership.

That’s all for me this week. The crack staff needs a walk and its my turn to make dinner so I need to run to Chick- Fil- A

Tim

Without a process to invest in stocks you really are not much more than a https://www.youtube.com/watch?v=jMwhs01Y21s&index=6&list=PLA755B6D20A043673

Be a Community Bank Pig

One of the more interesting things I have read this year was the transcript of the speech Stanley Druckenmiller gave to the Lost Tree Club in January. It was one of the more insightful papers I have read in some time. I may not invest and trade the way Mr. Druckenmiller but when someone who compounded at 30% a year with no losing years talks, it is a pretty good idea to listen.

One idea he spoke about was having the courage to be a pig when you see an outsized opportunity you should be a pig. He told the audience “I am here to tell you I was a pig. And I strongly believe that the only way to make long term returns in our business that are superior is to be a pig. I think diversification and all that stuff they are teaching at business school today is probably the most misguided concept everywhere.”
Although I tend to own a lot of stocks in my portfolio I think he is exactly right. When markets collapse I am an aggressive buyer of stocks. I do not pay much attention to sector diversification and although that has been a bit of a bust so far with my oil picks I am still pretty confident that my energy related stocks will be much higher 5 years from now. If found more that were both safe and cheap the fact that I already won several will not keep me from buying more.

The area where I think you could and should be a pig today is community banks. I view my portfolio as having several different bucket and right now my community bank bucket is just as full as it can be. I own a bunch of them and if you add all the buckets up more than half of my portfolio is in these little bank stocks. The tailwinds for this sector are incredible and they will be long lasting. Credit is improving, the economy is oh so slowly grinding higher and real estate is doing the same. At the same time you have rising compliance costs are making it very difficult for the smaller banks to turn a profit. Exhausted Board syndrome is a real thing in the banking space and many of the smaller banks are going to have to consider selling their bank.

At the same time you have a lot of small to midsize institutions that need to buy in order to grow assets, earnings and eventually the stock price. The banking market place is incredibly competitive and the low pace of economic recovery makes it difficult to grow while fighting jus to hold market share against the bigger banks. The cost of technology needed to compete is also rising and putting pressure on the bottom line. The only way to handle the cost of both regulation and technology is to spread them over a larger asset base.

Now add in the fact that activist investors specializing in bank stocks have been very active in the past year and are waging strong campaigns to increase shareholder value in dozens of community banks. A study done by Sterne Agee analysts last year showed that banks with activist investors owning more than 5% of their outstanding shares posted a huge outperformance over the last decade. These stocks returned 28% more than the KBW Bank index while the activist owned shares. Since the average index return was 17% that’s a huge return. 29% of the banks where activist were involved were eventually sold. These are not the famous, more well know activists like Ackman or Icahn whose filing would move the stock right away so these community bank specialist can usually be coat tailed with positive long term results.

It is time to be a pig with community bank stocks. I think that conditions will remain in place for piggish behavior for an extended period of time. If you do not own a bunch of these financially solid small banks that are trading below book value I think you are missing one of the biggest opportunities in the markets today.