Agora Financial has been trying to sell Chris Mayer’s Special Situations newsletter by pitching his “CPR Plan” — which is a strategy that he says he uses for 53% of his investing portfolio, and which has “NEVER lost money.”
I generally have a fondness for Chris Mayer’s stuff — he gave a good presentation at the Value Investing Congress earlier this month, and, despite the sometimes wacky promos run by his publishers, his actual investing ideas are often well-thought-out value pitches … at least, among the ones that I’ve unearthed in sniffing through his teasers or read about elsewhere. (He’s not alone — many newsletter editors are far more serious and analytical than their overheated teaser pitches would have you believe.) Mayer has had plenty of losing ideas too, of course, particularly in the commodities space, but I like looking into his pitches.
And this time around, he’s keeping his idea very obscure in the ad — he hints around about the existence of some nondescript buildings that will make us rich with these “CPR Plans”, here’s a sample:
“Sitting in a middle-class Texas neighborhood is an unremarkable box-shaped building. It’s close to the Stone Pony Apartments and across the street from the Pitman Creek Estates.
“The city is Plano — just north of Dallas. Nothing is famous about Plano. But if one day you found yourself driving on W. 15th Street in Plano under the hot Texas sun, you probably wouldn’t even notice this boxy building — let alone give it a second glance.
“You wouldn’t know that the activities that go on inside this bland concrete structure every day have made certain Americans — Americans who are in on the secret — about 76% richer in the past couple of years.”
He goes on and on about these buildings, citing a few other examples — but tells us that although the workers insider are doing something perfectly ordinary, and not building secret stuff, the money is flowing:
“Yet inside, workers are making folks far richer in just a couple of years. Returns that double, triple, quadruple their money and more!
“And here’s the amazing part. The workers inside don’t produce any physical goods. The building isn’t a biotech lab… a manufacturing facility… or a store of any type.
“What They’re Doing Inside Is Making a Few Americans Very Rich… Practically Without Any Worry
“Why no worry? Because there’s perhaps no better — or safer — way to make money in America today than by noticing what goes on inside these ‘invisible’ buildings.”
So what are these “CPR Plans?” Mayer pretends to answer that without actually supplying any of the crucial words that would make you say, “oh, THAT’S what he’s talking about!” …
What, “Community Profit Return Plan” doesn’t explain it for you?
“CPR stands for community profit return. And it could be a lifeline to restoring or growing your retirement wealth — even if you are NEVER a member of the plan. Because the fact is… anyone can use this low-risk, high-gain plan — if they only know about it.
“The origins of the ‘CPR Plan’ date back to the early 1800s. The first plans were created in England, but the idea quickly traveled across the pond to be a staple in American life. The first U.S. plan was created in Philadelphia on Dec. 20, 1816.
“Over the centuries, ‘CPR Plans’ grew in popularity. By 1986, 3,234 of these ‘CPR plans’ existed. But since then, you can thank government meddling for drastically cutting the number of ‘CPR Plans’ around. Only about 600 exist today.
“That’s because ‘CPR Plans’ have been forced to turn themselves over to Wall Street. It’s a final last-resort effort that allows the outsider turned CPR-hunting insider a shot to collect a final bonanza of gains. Most investors remain clueless about this event… and never even hear of this potentially profit-busting opportunity.”
Have no fear, your friendly neighborhood Stock Gumshoe is here!
These are mutual savings banks and thrift savings banks that are moving to full public ownership — so called “thrift conversions.” And these locally owned community banks that sell stock in an offering and convert to being publicly traded banks, sometimes over a couple steps, have been a focus of Mayer’s for a while.
He says he sees a big opportunity in these thrift conversions because they generally have an appealingly high level of cash and deposits, they don’t usually have complicated balance sheets or hidden liabilities or risky businesses … and they are likely to all complete conversions and go to full stock ownership in the years to come if they haven’t already, and, most likely, will be bought out in the expected continuing wave of small bank consolidation — largely because new banking regulations are a pain in the neck and sometimes costly, and it’s hard for a small bank to justify staying independent once they’re majority owned by public shareholders.
Here’s how he puts it:
“A recent study conducted by PricewaterhouseCoopers on the impact of Dodd-Frank on ‘CPR Plans’ concludes that ‘perhaps no group faces more substantial challenges to its business model’s long-term viability than [CPR Plans].’
“But for the informed investor, that’s actually good news!
“That’s because if the business climate gets too tough and “CPR Plans” do decide to “sell-out”, it creates a unique profit opportunity fro investors who follow this strategy closely – like I do.
“All of these new regulatory changes are spurring a final wave of ‘CPR Plan’ profits that you can participate in right now.
“Here’s one more thing you should know about the fate of private “CPR Plans”: Dodd-Frank hammers the final nail in the ‘CPR’ coffin.
“That’s because Dodd-Frank forbids any new private “CPR Plan” from being established. So the final 600 plans are all that’s left!
“Private ‘CPR Plans’ may be on their way out thanks to Dodd-Frank. But they’re going out with a bang — one that discerning investors should take advantage of …
“Remember, only about 600 ‘CPR Plans’ remain. And I don’t believe they can hold out much longer. Dodd-Frank will soon send them all to Wall Street … and the chance to invest will be lost.
“It’s no wonder Barron’s calls investing in ‘CPR Plans’ a ‘once-in-a-lifetime’ opportunity…”
OK, so that’s a glossed-over big picture for you — that Barron’s article that called it a “once in a lifetime” opportunity, by the way, was back in December 2010 — that mentioned a half-dozen thrifts that had converted or completed conversion recently, and all did pretty well (they all got a huge boost from the Barron’s article, but most have also risen nicely over the last two years). And that PriceWaterhouseCooper’s “closer look” at the impact of Dodd-Frank that Mayer quotes is here if you’d like to read the original. So if this “once in a lifetime” opportunity is something that’s still around for some community banks, should we have a look?
Well, let’s see if we can at least identify some of the thrifts Mayer is talking about. Here’s how he gets the hinting started:
“Now, here’s where you’re fortunate that you chose to listen to my presentation today. Because I have used my expertise to thoroughly vet all of the financial information on these ‘CPR Plans.’
“And I have selected eight of the best ones that are scheduled for strong double-digit gains over the next three years — maybe even less. I have a special report that I am eager to send you that reveals the names of these picks, their background and why they are the ‘CPR Plans’ you should consider playing within the next month or so.”
So which are they? Well, he only gives us clues about four of them … so I’ll try to name those for you, and then you can head out and look into them yourself — I like the basic idea of buying into small banks with good asset bases at a discount to tangible book value, but, unlike Mayer, I don’t have any particular affinity for the sector or expertise in analyzing bank balance sheets, so I’ll leave the opining to you.
Here are the four he teases us about:
“Asheville CPR: Sure Bet for a Sale
“My first “CPR Plan” recommendation is headquartered in yet another unremarkable building just off a busy highway in Asheville, N.C. Far away from Wall Street, this “CPR Plan” is proving to be an incredible profit opportunity.
“That’s because of an interesting twist I noticed. The CEO bought the maximum limit of shares — 150,000 shares. And he’s 73 years old. The average age of a CEO who sells out during an acquisition is 64.8. After the three-year mandatory wait for “CPR” acquisition, this guy will be more than ready for retirement. That’s a sure bet for a quick sale at a hefty premium to book value.”
This one is, so sez the Mighty, Mighty Thinkolator, HomeTrust Bancshares (HTBI), a decent sized thrift that is indeed headquartered in Asheville, NC. This is the holding company for HomeTrust Bank and a handful of other “partner” savings banks in the area, which together have 20 branches in the region, and they do all the normal stuff that small banks do — take deposits and make commercial, industrial, real estate and consumer loans, etc. They also just announced a deal to expand into South Carolina by acquiring BankGreenville Financial (BGVF)
And yes, the CEO (and Chairman), Edward Broadwell, is 74 years old, and he did (along with pretty much everyone else at the bank) participate in the $200+ million offering they made during their Thrift Conversion last July (there’s also been a small amount of insider buying in the $12-13 range over the past year, but most insider buying was made at that offering — the offering went through at $10 per share, so with a current price of about $16 those folks have done very well so far). From the records I see he bought $120,000 shares directly in the offering and 59,000 shares indirectly, so it’s not an exact match
HTBI does not pay a dividend, but it does trade at a discount to book value — they report their tangible capital at $372 million, which is pretty much the same as book value in this case, and the stock trades at 90% of book value. They have been growing earnings, but have not been growing deposits in recent quarters — they think the Greenville acquisition, which is small relative to the size of the bank, will be accretive to book value within 2.5 years. And I don’t know if the CEO is planning on selling out — he talks about continuing to acquire small savings banks and build the company, but unless he’s got Warren Buffett’s energy he might not be working much longer.
I don’t know the company well, but it’s a decent sized thrift with a recent conversion and a pretty strong regional presence. Their biggest competitors are mostly gigantic banks, Wells Fargo is very big in that area, for one — and the other local bank that’s a decent size and is publicly traded is ASB Bancorp, ASBB, which did a thrift conversion in 2011 — it’s smaller and cheaper at first glance, but doesn’t match the clues. I didn’t see anything particularly frightening in a quick glance at HTBI’s financials, but I would certainly defer to Chris Mayer on evaluating banks — he was a banker before being a newsletter guy, and this area is one of his specialties.
How about his other teased picks?
“Nebraska CPR: Farming for Profis
“My second ‘CPR Plan’ is located deep in farm country in Nebraska. It’s been serving rural communities here since 1888. It’s sitting on tons of money, which makes it a prime acquisition target. Insiders love this plan too, snapping up 8% of the stock at the offering. It’s a premier opportunity to profit.”
1888 was actually a pretty lively time for setting up new banks in Nebraska, but going from those limited clues we’ll have to do a bit of guessing — best guess is a thrift conversion from last year, Madison Country Financial (MCBK). No, not that Madison County — the one with the bridges is in Iowa.
This one has a pretty decent size deposit base relative to their market cap, it appears, and they also trade at a discount to book value (86% of book currently). The CEO, David Warnemunde, has been a pretty consistent buyer of shares on the way up (the shares converted in an offering at around $14.50, it appears, and are now at $17). They just started to pay a dividend in April and their policy is to pay out 25% of income each year as a dividend — but they’ll pay it annually, so if you buy in now you won’t see a dividend until sometime in the second quarter next year.
“New Jersey CPR: Stuffed with Cash
“Another ‘CPR Plan’ is located in the fashionable Union and Middlesex counties in New Jersey. I really like ‘CPR Plans’ that are well-managed with a lot of cash. This ‘CPR Plan’ is stuffed with cash and an impressive 24% equity to asset ratio. Plus, management has been steadily buying back its own stock – a sure sign of good health!”
This one, it appears, is the much higher-profile Northfield Bancorp (NFBK), which is indeed focused on Union and Middlesex Counties in New Jersey, though it also has a substantial presence on Staten Island, NY. This is one that has been publicly traded for some time as a hybrid public/mutual bank, but completed the second step of their thrift conversion last year — and since they’re much closer to New York City and in a much wealthier area, more people noticed. NFBK was featured positively in Barron’s recently, which also called attention to their large cash position and their potential for buying back stock (insiders have not been buying, the only insider transactions I saw were sales at higher prices, but the company has been buying back its own shares).
The analyst quoted in Barron’s put a $13 target on the stock, it’s at about $11.50 now. Their latest earnings announcement, including explanation of their recent special dividend, is here. Looks like they’re doing well, and they are, like the others, profitable, they pay a 2% dividend if you ignore that special one, and they are trading at a discount to book, with plenty of cash on hand.
And one more …
“Paoli CPR: Top Investors Approve
“Another ‘CPR Plan’ is out of a nondescript building hiding in a strip mall in Paoli, Pa. Two of the best investors I know have scooped up 18.6% of the shares. These investors very rarely lose… and, should you choose to get in, I don’t think you will either.”
This one is almost certainly Malvern Bancorp (MLVF), holding company for Malvern Federal Savings Bank — they are headquartered in Paoli, PA and currently have eight branches, and they are very small, with a market cap of only about $75 million. They also trade at a larger discount to book value (they’re at 76% of book) and are profitable, though they don’t pay a dividend.
I suspect the two investors Mayer mentions are Joseph Stilwell, who runs Stilwell Value in New York and is something of a specialist in these kinds of investments (he was quoted in that Barron’s article as such back in 2010), and PL Capital, which is a firm run by John Palmer and Rich Lashley and which specializes in small bank stocks — PL Capital are activist investors who push for improvements in small banks, so that’s probably a good sign but I don’t know at what price they built their position, MLVF has seen its stock more than double in 18 months. If you’d like to know more about PL Capital and their focus on small banks and the safety of that strategy, they actually have an interview that Chris Mayer did with John Palmer on their website here. PL Capital, for what it’s worth, also owns Northfield shares and added to their positions in both Northfield and Malvern in the first quarter.
So there you have it — those are, I’m pretty sure, the four “CPR” Banks that Chris Mayer is teasing (he doesn’t provide any hints about the other four) … and while all look quite reasonable and appealing at a discount to book value, and with a decent and basic local banking business, I have not dug deeply into the balance sheets or assessed the health of their loss reserves or their prospects for deposit growth or anything like that.
My guess is that these will be relatively stable small banks given these valuations, but I certainly don’t know how the continuing consolidation and de-mutualization of the savings bank industry will impact them, or what the likelihood is of substantial premiums if these banks are the focus of takeovers in the years to come. If you’re buying into little banks like these do note that they’re all small and dependent on a pretty concentrated local area for the health of their business — loan and deposit growth won’t necessarily come easy if their region is in a slump or experiences a shock, for example, and local or regional economies can always take a hit that hurts local businesses without it making headlines that we’d notice. I expect you’d either want to get to know them and their business prospects pretty well and get comfortable with their management, or buy a diversified basket of a bunch of these kinds of stocks if you’re just playing off the theme that the small thrifts are likely to get bought out (or, of course, you could be both diversified and carefully analytical if you’ve got the time and inclination).
If there are any banking experts out there, or folks who’d like to chime in on these or other thrift conversions, I’d be delighted to hear what you think — just use the friendly little comment box below to share your opinion with the world.
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