About a month ago I wrote a Friday File for the Irregulars that was based on a pitch the Motley Fool was making for an Internet banking company — it was all about how bricks and mortar are dead, and about how a prescient “mysterious investor” at the Motley Fool had a history of picking great stocks during transition periods like this.
They were selling their Hidden Gems newsletter at the time, and pitching a stock that has indeed risen nicely over the last month or so since they started teasing it … and that “mysterious investor” touted was the Fool’s Chief Investment Officer, Andy Cross.
But now, interestingly enough, we’re seeing almost exactly the same ad … with the same headline, same “$20.8 Trillion Secret” … but the “mysterious investor” is now Motley Fool co-founder David Gardner, and the newsletter they’re selling is his growth-focused Rule Breakers newsletter.
So does that mean this has moved from being a “hidden” value stock to a “rule breaking” growth stock in four weeks? Or does it just mean the ad didn’t work that well with Andy Cross’ name attached, and they wanted to put Dave Gardner in there instead? I don’t know — Hidden Gems has done dramatically worse than the S&P according to the Motley Fool’s own performance tracking numbers (it did have some years when it did dramatically better, particularly when founding brother Tom Gardner was at the helm, but that was a while ago), and Rule Breakers has done dramatically better than the broad market, so maybe they’re just touting the winner. Who happens to be the boss.
So in case you’re interested in this one, I’ve excerpted some of what I shared with the Irregulars on May 24 below:
“Subprime mortgage crisis… credit defaults… interest rate fixes. Even combined, they’re nothing compared to this hush-hush conspiracy only whispered about in big banking’s lavish private suites.
But here’s the kicker — buried in this cover-up is a unique $20.8 trillion moneymaking opportunity. And early in-the-know investors are already using it to turn the tables on big banking. While making some immediate, real profits in the process….
“At one point in your life, even if only for a moment, you regretted NOT investing in one of the three following companies. Or if you did invest, you wish you’d done it earlier…
A) Retail giant Amazon.com (+17,255% since IPO)
B) DVD renter and movie streamer Netflix (+1,851% since IPO)
C) iTunes juggernaut Apple (+14,101% since IPO)
“The one thing those companies all have in common is they found a traditional industry, took it online, and started knocking their stone-age competitors off like dominos….
“Life is all about second chances (and sometimes fourth chances).
“And as I’m sure you know, those chances don’t come along very often. In fact, they may NEVER come along. But when they do, you better grab them. Quickly. Because they’ll be gone in the blink of an eye.
“Luckily, a second chance is exactly what I’m offering you today. Because a company following in the footsteps of Amazon, Netflix, and Apple has finally emerged.
“And it stands to be a bigger story than all of them. Combined.
“The next market sector about to get turned upside-down is tops in the world in profit AND market capitalization….”
OK — so that’s not subtle at all. And I’ve already told you that this is an internet banking story, but we’ll borrow a bit more from the ad to try to draw out the future dramatic returns they expect:
OK, so that’s all stuff we know — banks are ratcheting up fees, partly because they can’t steal from us in other ways and partly because they can’t make money with interest rates low, especially if they’re not lending very aggressively … and the little fees every month are certainly aggravating.
“Meet one the most hated industries in the country…
“Americans are so fed up with these commercial banks right now…
“Savings account rates are at near-historical lows, while banks are charging more fees than ever. The dreaded ATM fees, remote deposit fees, and even paper account statement fees are all now a growing part of the income strategy for most banks.
“Yes, you read that right. You’re probably getting charged THIS MONTH for the bank to send you a paper version of your own billing statement.
“In fact, what many Americans don’t know is that nearly 33% of bank income is now made up of “non-interest income” — or penalty-fee income. A number almost double what it was back in 1970…”
So the Fool’s pitch is that people are waking up to the fact that they don’t need traditional banks anymore. Now, there’s a flip side to this, too — local banks have been doing much better in some areas, particularly for folks who still like the physical building and the friendly teller and the local philanthropy that comes from neighborhood banks. I can echo that there’s still a lot of anger about the big banks here in the wilds of Western Massachusetts, and I expect the local Bank of America branch isn’t exactly bursting with new customers … but the handful of genuinely local banks and credit unions are all building new branches like crazy. It seems that the only building going on around here, truth be told, is bank branches and new auto dealerships. Makes me wonder why the bank branches haven’t taken over the closed Blockbuster video store locations, actually.
But anyway, that’s the basic idea — we’re moving not just to online banking, which pretty much every bank offers, but to internet-only banking, with no need for a branch at all. Here’s some more from the ad:
“I’m not just talking about using your current bank’s online service. A lot of people are already doing that… you’re probably even one of us… while still putting up with all of big banking’s tiny to not-so-tiny annoyances.
“But I’m talking about something far more radical… the end of brick and mortar banks entirely.
“Look, whether we like it or not, everybody knows the world is moving online. Retail with Amazon. Job hunting with LinkedIn. Travel planning with Priceline. Heck, Facebook is taking the entire concept of social interaction and relationships away from face-to-face interaction and putting it at your fingertips.
And with a 4% average annual decline in branch traffic over the past 16 years, banking is the natural next domino to fall. That exact domino is currently wobbling on the edge of the table… just waiting for eager investors like you to lap up the sky-high profits when it finally hits the ground…”
And there are good reasons, as investors, why internet banks look appealing …
“every time a brick and mortar bank executes a transaction, it costs roughly SEVEN times more than the same transaction done through an ATM or mobile device….
“Internet banks… put that cash directly BACK in your pocket through vastly increased interest rates on your savings accounts.”
So that’s the big picture “why internet banking is growing” spiel — how about some clues about the actual company? Thankfully, they oblige there as well:
“The ONE STOCK to get rich from Internet banking…
“Of course, just finding the right trend isn’t always enough to make you filthy rich. You also have to know which company to invest in within that trend….
“I already know the exact stock you should be investing in to take advantage of the Internet banking revolution.
“And, of course, that very stock also happens to be David Gardner’s next rock star company.
“Financial analyst Mike Pate says it’s… ‘A Better Bet Than JP Morgan and Bank of America’
“So you can invest without the usual fear that you may be picking the exact wrong stock….
“As you probably surmised, this company is actually an Internet bank itself.
“And even with all the competition in the industry, Market Watch calls it… ‘The Best Bank of the Year’
“It’s also what David Gardner refers to as a top dog and a first mover.”
And all that chatter from the teaser pitch “presentation” is essentially unchanged, other than the fact that it used to be …
“It’s also what Andy Cross refers to as a Hidden Gem.”
And then we get into a few details that help us nail down the specific internet bank they’re pitching:
“… members from all 50 states have already made the upgrade to this new-age bank headquartered in San Diego. And were so satisfied that a recent award touted this bank as the 2012 Top Service Provider for ‘providing service above and beyond already high standards.’
“How’s that for likeability?
“… those same members quickly bumped its total assets to $2.9 billion. Not to mention deposits and loans have nearly tripled over the past five years… with no end in sight to the massive growth we’re currently seeing.”
We get a few more details — they cite the efficiency ratio of this “Mystery Bank”, which is better than 40% — the big guys they cite are all in the 60-80%+ range (and yes, lower is better). It has also more than doubled over the last year, which is another hallmark of David Gardner picks — he likes to buy stocks that are growing and considered overvalued by analysts, and he doesn’t worry much about whether he’s caught all the growth on the way.
That $20.8 Trillion number is a reference to the size of the US banking market, so we’re not going to hit that anytime soon — but the tease says this is a stock with a market cap of just over $500 million, so the aggressive growth potential is absolutely there — they haven’t even made a dent in the consumer banking market.
So yes, this is Bank of Internet, trading under the holding company BOFI Holdings (BOFI). Bank of Internet has been around for many years, it went public in 2005 and it’s been calling itself the oldest and most trusted internet bank. The stock is at all-time highs now, thank to persistent and steady growth in lending, deposits, and earnings … and for the first time in its history it’s been trading at a meaningful premium to the book value of the company (it’s now more than 2X book value — for most of its early years it traded like a small, weak or unprofitable bank, at a discount to book).
But — also unlike most banks — BOFI turns it’s deposit growth and loan growth into earnings pretty quickly. They’ve expanded into more commercial and residential lending over the past couple years, and their earnings per share have climbed substantially. If you don’t have tons of employees or bank branches and are counting simply on offering lower rates and paying commission leads to sites like Bankrate.com, you can turn revenue into earnings pretty easily.
I don’t know how long that will continue, I think the competition among online banks, particularly from names like Ally Bank and ING and Everbank, is likely to cut into margins — but Bank of Internet does have admirably high Return on Equity (ROE) and a high earnings growth rate compared to all of the more traditional banks I looked at (their ROE is around 16%, even great banks like Wells Fargo are down around 13% and most are closer to 10% or less, sometimes far less).
The big picture for BOFI Holdings is not their valuation as a bank right now, but the growth. Their efficiency and net interest income are good, but not so good that you’d want to pay such a high multiple of book value relative to other banks if they weren’t growing so fast.
The issues to think about are probably loan quality and growth going forward — can they keep growing at this pace, and can they avoid the bad loans (or concentrated loans) that hurt the whole banking sector last time around? Banks are seen as dowdy and convervative for a reason — because they know that if they change too fast or grow too fast they might lose the effectiveness of their risk management. I don’t know of any reason to be worried about that in this specific case, but it’s a concern in general for banks that grow quickly — and it doesn’t really show up on the books until loan losses show up.
But of course, all banks are more worried now than they were a decade ago … the higher scrutiny they all started to apply following the 2008 crash has not gone away (yet, at least).
BOFI Holdings is a David Gardner pick as well as being a teaser pick for Hidden Gems, and Gardner’s connection is not surprising — he loves companies that are growing fast and can disrupt entire industries and grow far more than analysts are expecting.
That’s a shortened version of what I shared with the Irregulars back in May, if you’re in that group you can see our slightly longer original piece here. So what do you think, interested in a play on Internet-only banking? This particular play brings in high growth and a high valuation, typical of a David Gardner stock — it traded at all-time highs both when it was originally teased a month ago, and today is at still-higher highs … will it keep going? Let us know what you think with a comment below.