I had a chance earlier this week to sit down and chat with Robert Hendershott of Context BH Capital. Context is a fund the employs an event-driven, long/short investment strategy focused on the community and regional banking sectors. They invest in banks that are acquisition targets of aggressive consolidators and capturing takeover premiums in advance of acquisition announcement and select merger arbitrage transactions post-acquisition announcement.
This firm was built from academia, not Wall Street. Mr. Hendershott was a professor at Santa Clara University where he wrote several papers about the likelihood of banking consolidation once interstate banking regulations were relaxed. He realized that there was money to be made here and in 1998 he became an advisor to a hedge fund and eventually struck out on his own. In 2010 he started managing individual separate accounts and started the fund in 2012.
Mr. Hendershott pointed out that consolidation has been going on for a long time. When all this started in the late 1980s and early 1990s, there were over 16,000 banks in the United States. Today we are down to just about 6,000. He also noted that the number of publicly traded banks has stayed about the same over this time. The banks that have disappeared via M&A have been small private banks for the most part. He thinks that the thousands of smaller banks in the US are an endangered species right now.
He is cautiously optimistic about community banks in 201. If all the expectations of lowered regulations and tax cuts coupled with a growing economy and higher net interest margins today’s prices will be an excellent entry point. He is worried about the timing and form of all these changes and exactly who changes are made to banking regulations and tax code. I have said for since the election that if it all comes to pass it will be a community bank bonanza. Given that we are dealing with politicians and the legislative process there is a lot that can go wrong along the way.
He said several times that it is just not a lot of fun to run a bank these days and that provides an incentive to merge. The burden and cost of running a small bank today are enormous, and many bankers are suffering from what I have called exhausted board syndrome. They are tired, and the current improved pricing may spur some to ring the bell and sell the bank.
I share Mr. Henderhott’s views pretty much down the line. We will continue to see M&A activity and it will go on for years. We have too many banks, and consolidation has to continue no matter what happens in Washington this year. I worry about current valuations in the sector, but among the smaller banks, I can still find some banks to buy at bargain prices. The Trade of the decade continues and will for some time still to come.
SnapChat priced today, and I am supposed to have an opinion as a responsible observer of the financial markets. I have no idea what the stock will do, but my opinion is that this is a piece of crap. The valuation is ridiculously high, and corporate governance is non-existent as investors will be buying shares with no voting right. As near as I can tell the app exists so millennials and teenager can trade Boobie pics and has little to no practical purposes. I confess that I am very suspicious of parents who teens have the app on their phones and there is no chance in hell the youngest will ever have it while I pay for the phone. The stock will be priced at 60 times revenue at the IPO price. The corporate governance issues alone would keep me from buying the stock but the valuation ad some very real questions about exactly why we even need a company like this further my deep aversion and dislike for the stock and the company.
The market hit 21,000 on the Dow this week in a rapid fire move up from the 20,000 level it hit earlier this year. Wall Street is in love with this new President and his agenda but as Mr. Hendershott observed when discussing the bank there is a long way to go. He is the President to be sure, but he is not the Emperor. The key provisions of his plans have to be legislated, and it is clear from the behavior of the Democrats during Tuesday night’s speech they have no intention if playing along or cooperating in any form. They refuse to even agree with him when he agrees with their ideas. Tax and Regulatory reform are still a long way off, and stocks are priced as if it all starts to hit the bottom line tomorrow morning. If you are not cautious here, you are not thinking things all the way through in my opinion. Cautious optimism and a strict adherence to valuation with an increased emphasis on margin of safety seem to be the best course of action.
On a happier note, I got a look at the new book release schedule for March and its pretty exciting. Randy Wayne White, Greg Iles, Clive Cussler, Robert Crais, Paul Levine, Ken Follett, Janet Evanovich, Stuart Woods and some other favorites will be out this month. Since I am spending a week at the beach in Texas in March while visiting my in-laws, I intend to do a lot of recreational reading this month.
That is when I am not watching baseball. The MLB app that allows me to watch games on my phone is one of my very favorite inventions of all time. In addition to the Spring Training games, I can and will be watching the World Baseball Classic as well this spring. The AL East is shaping up to be a dogfight this year, and I see a lot of books and baseball in my future. Reading a good book while watching the ballgame over the top of the page is one of my favorite ways to spend an evening and the new release list, and Spring Training results so far appear to offer some great opportunities to do just that for the next several months.
I am starting to work on my baseball predictions for the 2017 season and will have that around the third week of the month for you. We had a good year last year predicting division winners and had the easy prediction of the Cubs winning it all. There have been a lot of offseason moves and some good young talent that will make their MLB debut this year, so it is going to be a bit tougher to get it right, but I think I am up for the challenge.
Everyone is pretty excited about the markets right now. At such times I like to recall Mark Twain’s suggestion that “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
Have a great week
Let’s be careful out there, so we don’t end up shedding