by Travis Johnson, Stock Gumshoe | March 22, 2017 2:21 pm
I’ve gotten a lot of questions about this latest pitch from Chris Mayer[1]… and, honestly, I probably can’t provide an exact answer for you — not enough clues have leaked out just yet. But I’ll dig into it and make some guesses.
The pitch is that Mayer is about to make an “urgent announcement” – here’s a bit from the ad that folks have been forwarding to me about a conference call that Mayer is hosting:
“The #1 investment Chris Mayer recommends you make right now – this is an urgent situation you have to take advantage of – and he is only sharing it for the first time on this call.
“On Thursday, Chris Mayer will tell you all about this investment… which is one of his all-time favorites. He has invested in it personally, recommended it a dozen times since 2010, and never lost money on one of these deals…”
Never lost money? That sounds good!
What else?
“This investment has proven over a back-test of 645 investments to pay out an average of $6,200 for every $10,000 invested, with 86.9% certainty.
“Some of the world’s greatest investors call it a ‘can’t-lose proposition’ and say ‘it’s almost like getting money for free.'”
And, of course, there’s some urgency to this deal:
“… the main investment idea he has to share with you on Thursday is a limited-time opportunity. It’s very compelling, and if you are interested, you will only have a short window of time to take advantage of it….”
So… what is it? Well, knowing what Chris Mayer has been excited about over the years, I suspect he’s again talking up mutual conversions, also sometimes called thrift conversions. That’s when a mutually owned bank (meaning it’s owned by its depositors) converts to being a stockholder company (owned by shareholders). This conversion process takes a year or two, usually, and involves the company restructuring, offering shares to account holders and insiders at a conversion price, and then going public to offer up any remaining shares not claimed by the mutual owners.
Generally this happens in two stages, with a portion of the bank converting to stock ownership at first, setting a price for a while, and then the remainder of the conversion happening as the mutual owners give up full ownership and control with a second conversion offering.
I don’t know whether the 86.9% certainty number is a general one, but it is widely accepted that these tend to be good investments — though they’re not always exciting or sexy. It is almost always a great deal for the folks who have savings accounts in those banks that convert, because they get the opportunity to buy shares at what is usually a significant discount to book value.
There’s a good general article about this process from Reuters here[2] if you’re curious — it’s a few years old, so the examples aren’t current, but the process hasn’t changed.
And though we’re running low on mutual conversions, since so many have converted already, this is not a new idea — Peter Lynch[3], famed former manager of the Magellan fund at Fidelity[4] and author of One Up on Wall Street, one of the better and more popular books for investors available (definitely worth a read if you want a basic primer on the market), wrote quite a bit about mutual conversions, and he’s not the only well-known investor who likes the strategy. They also crop up in the popular press from time to time — like this Boston Globe[5] piece. Despite the attention, these investments still apparently do very well on average… perhaps because they’re mostly fairly small and boring.
Oh, and Chris Mayer himself wrote a piece for the Washington Post[6] a couple years ago on one strategy that folks have used, opening up accounts in a variety of mutual thrifts (savings banks) and waiting for them to convert so you, as an accountholder, can buy in cheap (generally the first crack at buying shares in a conversion goes to those who’ve been accountholders before the conversion process is contemplated or announced).
The big advantage in that initial conversion is that new money is going in (those who have a right to buy shares pay for them — for example, at $10 a share), but the valuation at which they buy in is based on the company before the cash infusion… so that cash goes in and inflates the book value right away, and the banks are typically offered for conversion at a discount to tangible book value anyway. That sets up for good odds that the shares will appreciate, since they’re undervalued and the bank is likely, after the conversion, at least a little bit overcapitalized and therefore likely to either grow (perhaps by acquiring other little banks) or be acquired. Throw in the fact that a gradually rising rate cycle is likely to be good for net interest margins, which is where most standard savings banks earn a lot of their money, and it’s both a good strategy and potentially a good time for the sector as a whole.
There are two strategies that tend to be popularly considered by investors — the first is just to buy these conversions either after the first step or the second step of the conversion, often right near the IPO[7] if the IPO doesn’t get a lot of attention and go too crazy in price. And the second is to look at the banks who converted a few years ago and see whether some of them are attractive, because the other key to these mutual conversions it that they make it easier for a bank to participate in the ongoing consolidation of the banking industry.
What does that mean in practice? It means that three years after they convert to stockholder companies, banks become eligible to be acquired. And they often are.
So what are the urgent opportunities Mayer is talking about? Well, assuming I’m right and he’s talking up mutual conversions again, the two companies that have filed for IPOs but haven’t yet gone public as newly converted banks are Eagle Financial Bancorp (S-1 here[8]) in Cincinnati, and PCSB Financial (S-1[9]) in Westchester County, NY.
My best guess is that he’s probably interested in investing in PCSB Financial if the IPO doesn’t pop too crazily (or if you’re lucky enough to get in on the IPO), because that’s likely to be one of the most ardently followed mutual conversions in a long time — mostly because it’s headquartered in a wealthy NY suburb, where banks are very valuable (there have been some serious windfall earnings made by folks investing in the last big wave of NY mutual conversions)… and, perhaps not coincidentally, lots of Wall Street folks live there so this is not one of the conversions that will go unnoticed for long.
I don’t think an IPO date is set for that one, but the conversion dates are past (the final deadline was March 17 for account holders to register for shares, I believe), so it could come at almost any time. If I can get an allocation to those shares, I will, but that’s extremely unlikely.
What else could it be? The wave of three-year-old conversions is getting pretty big now, and there are maybe a half-dozen or so stocks that will become eligible for acquisition this year — with, presumably, a nice premium price paid for any that will be acquired. So what are they, and do any stand out as opportunities?
Here are the ones I’m aware of that are either three years out from their IPO, or getting close to that date, I pulled the data out of a CapitalIQ Report:
Coastway Bancorp (CWAY) — Warwick, RI (Jan 2014 IPO)
Edgewater Bancorp (EGDW) — St. Joseph, MI (Jan 2014 IPO)
Waterstone Financial (WSBF) — Wauwatosa, WI (Jan 2014 IPO)
Clifton Bancorp (CSBK) — Clifton, NJ (4/2/14 IPO)
Sugar Creek Financial (SUGR) — Trenton, IL (4/9/14 IPO)
Home Bancorp Wisconsin (HWIS) — Madison, WI (4/24/14 IPO)
Other than Edgewater, for which data doesn’t come up in YCharts for me for some reason, those are all growing revenues and look like they’re priced at relatively reasonable price/tangible book valuations that could provide for room for a takeover premium if they’re otherwise appealing. I would be most curious about Clifton Bancorp, personally, because it’s trading at what is probably (not knowing anything else about it) a reasonable premium for a high-density area (1.18X tangible book value, its locations are spread around several of the close-in New York City suburbs, from Hoboken to Paterson) and it’s larger than some of the others, so that gives slightly better odds that it could be a meaningful acquisition for a big bank that wouldn’t mind overpaying a bit. And since they’re only 10 days away from exiting that acquisition moratorium period, well, perhaps that could be the urgency that Chris Mayer’s ad is expressing.
That’s a wild guess… and there’s no guarantee of a nice, fat acquisition with any of those, of course — going back to 2000, well over half of the mutual conversions were eventually acquired, but a couple of them also failed in the financial crisis and only about half of the mutual conversions since the crisis have been acquired. But, frankly, that’s pretty good odds — I can’t think of any other identifiable groups of stocks where you can take a basket and be pretty sure that about half of them are going to be taken over in the next 5-10 years.
Historically, these banks are generally acquired at a premium to tangible book — but it could be a small premium or a large premium, it depends on how attractive the bank’s franchise or local community might be (you want to own growing banks in healthy small towns, regions or suburbs, where there’s either a decent chance of fundamental growth in deposits or loans or where other banks might want to expand).
And, of course, if the market falls and banking valuations fall, these stocks will fall along with them — I’d guess that they will keep up with the historical averages and do better than the market, with relatively lower risk, but that doesn’t mean they’ll necessarily go up if the market goes down, and it’s quite possible that some of them have individual problems or issues that should concern investors — I haven’t looked at the individual businesses to any real degree.
If you do decide to pursue this kind of investment strategy, either buying up mutual conversions as soon as they go public or buying them up later in hopes they’ll be acquired (or, better yet, getting in on the conversion or the IPO), it’s important to remind yourself that you’re looking for returns of 30-60% over a few years on a takeover, with some luck, you’re not looking to shoot out the lights… and you might just end up with a small bank with reasonable financials and slow revenue growth that generates a lower profit than that (or, of course, a lousy bank that screws something up, or has the major employer in its town shut down operations, or goes bankrupt because the CEO does something crazy and runs away to some non-extradition country… as can happen with any company).
So I’ll leave you there — No, I’m not sure that this is what Chris Mayer will be talking about tomorrow in his “conference call” ads for potential Bonner and Partners subscribers, but that’s my best guess. And there’s no real secret to mutual conversions — they’re just a little bit boring and require a little more work if you want to seek them out and invest in a basket of them. If you’ve got some favorites, or other ideas for what Mayer might be touting, feel free to chime in with a comment below. Thanks for reading!
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He’s right. I saw it happen with Richmond County Savings Bank taken over by $NYCB. They offered shares at $10.,oo to customers and when it became listed it doubled overnight then kept going and then splitting, plus putting out a .25 quarterly dividend on top of it. It was a terrific gift from a small bank.
Great informative article, Travis. Thanks a lot for sharing. I knew little about mutual conversions prior to reading. For portfolio managers and clients with long-term, fairly-conservative objectives, I think this could be a nice little, albeit boring, niche in which to allocate funds.
That’s great, but how do you play before the IPO?
You don’t, unless you’re a savings account holder well before conversion and can buy in before the public. But buying after the first public offering has worked well, on average.
There have been a lot of folks, even some hedge funds, who go around opening savings accounts at all the mutual thrifts so they have a foot in the door if that bank ever converts.
Absolutely right, you need to have an account before the record date for the IPO and they usually allocate the amount of shares you can buy according to the size of your account.
Thanks, Travis, for the Executive Summary portion of your articles. While I really enjoy your in-depth perspective/analysis on things (that’s why I will continue being an irregular) , sometimes I just don’t have the time to read it thoroughly.
I listened to much of the “special event” today — Mayer is indeed recommending a mutual conversion (he calls them thrift conversions) that he says is going to go public “any day now”. He did explain the process of demutualization more in the presentation, but did not name the specific upcoming IPO he thinks is a great opportunity. Since he’s now clear that he’s excited about a not-yet-traded mutual conversion, I suspect he’s recommending that you get in on the IPO of PCSB Financial, or buy it shortly thereafter with the hopes of getting shares in the first few days of liquidity at a price that’s a discount to book value.
Very interesting article, worth noting the growth in Chinese Securities Stocks which can be bought through HK, this sector alone already worth 400 Bill and only had there current stock market since 89, http://eqibeat.com/top-20-chinese-securities-firms-by-dividend-yield/
Very thinly traded but nice pops on these with the potential to go higher if a suitor comes along looking to acquire them.
Hey, Gumshoe, you hit the nail on the head! The urgent opportunity is, in fact , PCSBbank, Brewster, NY. I like your thoughts about Clifton Bancorp Inc, though. I’m still kicking myself about passing up the opportunity to subscribe to the Investors Savings Bank conversion a number of years ago when they did their conversion. I had been a long-term depositor there and just didn’t recognize the future value in their growth potential, lol.
Chris has some interesting “special situation ideas” and his new FOCUS service may well be a value to many at the “discounted price” he offered at the end of his video.
I’ve requested a prospectus from PCSB and I’ll be looking for stock IPO. I’m just not sure if I’ll bite, lol.
Keep up the “good work”!
Travis
Charts for the stocks you listed the IPO dates for show the stocks trading well before the IPO date, for instance, CSBK IPO’ed 4/02/2014, however the chart goes back to March/2012. It is also clear on the chart something important happened on 4/02/2014. Was there a market for these stocks before the public IPO date?
I’d have to double check — i was using data from an article on those, I think from SNL Financial. It’s possible that I’m off or that those were second-step conversions rather than IPOs.
Travis: Hats off to you for another great evaluation of Chris Myers
savings bank pitch. This thoughtful presentation underscores what I have urged several times in emails to you, namely that you are undercharging for your services to the Irregulars. Please consider an increase in fees to at least $79.00 or thereabouts. Your work is much more valuable to us. You (and your legendary thinkolater) need some breathing time and fuel to keep your engines up to speed.
I discovered this memo at the PCSB on-lone site.
Contact:
Joseph D. Roberto,
Chairman, President and Chief Executive Officer
or
Scott D. Nogles
Executive Vice President and Chief Financial Officer
(914) 248-7272
PCSB FINANCIAL CORPORATION EXTENDS SUBSCRIPTION OFFERING
EXPIRATION DUE TO FORECASTED NORTHEASTERN SNOWSTORM
Yorktown Heights, NY; March 13, 2017 — PCSB Bank and its proposed holding
company, PCSB Financial Corporation (“PCSB Financial”), announced today that, due to the
forecasted snowstorm tomorrow, the expiration date and time of the subscription offering being
conducted by PCSB Financial in connection with PCSB Bank’s mutual-to-stock conversion has
been extended from 5:00 p.m., Eastern Time, on Tuesday, March 14, 2017, until 5:00 p.m.,
Eastern Time, on Friday, March 17, 2017.
The Stock Information Center, located at PCSB Bank’s executive offices/headquarters in
Yorktown Heights, will be closed on Tuesday, March 14, 2017, and is expected to re-open on
Wednesday, March 15, 2017 at its normal time, weather permitting. The Stock Information
Center’s hours of operation are 10:00 a.m. to 4:00 p.m., Eastern Time.
Chris Mayer and his promoters are pushing to generate excitement so that persons subscribe to their services. On that issue I do not have axes to grind.. Sales pitch is the order of the day. However I wish to caution readers that once upon a time I subscribed to his investment letter ‘Capital & Crisis’ that resulted in loss. I can only hope that he has learnt lessons form his past mistakes.
Good point — I generally find his ideas interesting, and conversions are certainly at the low risk/moderate reward end of the spectrum, but ive certainly written about plenty of his overhyped teaser stocks that really flopped as well.
I also subscribed to Focus which is 2400.00 for 2 years. I also feel he is selling hard which makes me wonder why if they are so successful at investing? The Agora Advisors only talk about their winners……never their losers…sad but true
What do you know about Agor , Adam Mest RED LIQUID promotion ?
That’s just a variation of the “gold cured my cancer” ad, they tweaked it so they could include the attention-getting phrase “Immortal Trump” — my article about that one is here.
Hi Travis,
Where do you find out about mutuals’ registrations, so you can know to look out for their IPOs? Is there a way besides an EDGAR search by S-1?
Cheers,
MC
PCSB going public 4/21/2017
Yep. Hopefully it opens nice and low around $15 or less, but I’m afraid it could be much higher. We’ll see.
Will 15 or below be a good price to buy?
Focus subscribers are recommend to buy till $15.50
That’s a pretty restrictive valuation, the stock opened at $15.76 and has traded above $16 every day since, so if the $15.50 is true sounds like Mayer wasn’t able to get in yet.
I opened a position personally in the low $16s on IPO day and added to my position a couple weeks ago after there was a swath of post conversion buying by three insiders. I expect I’ll probably hold for the three year moratorium to see if they get a buyout offer or are able to grow the business, but one never knows what the future will hold. I do find it compelling that several insiders both maxed out their share buying at the conversion price and also bought meaningful chunks later at market prices, but that doesn’t mean the insiders are right about where the business is headed.
FYI, I just went back to check this story and Clifton did end up getting acquired — though they were acquired for stock by Kearny, another newly public bank in New Jersey, so it didn’t end up being a huge premium (at the time of the announcement, the valuation was over an implied $18/share, but a falling price for Kearny has brought that back down).
Now, of course, the question is whether Kearny itself is an attractive takeover target as we get close to the three-year anniversary of their mutual/thrift conversion — which will be in May 2018. Did they buy Clifton to beef themselves up and make themselves a more compelling acquisition target, or will they continue to try do grow on tehir own? I’ve seen some negative commentary about KRNY’s aggressive risk profile (in terms of their loan book and their loss reserves), but I haven’t actually looked at the numbers myself.
There’s a good article here from Banking Exchange that lists several conversions that recently became eligible for M&A, as well as the conversions that will be hitting that three year anniversary this year.