Monday, April 28, 2014

Update for Regional Bank, REIT and Lottery Ticket Basket Strategies/Bought: 50 RSO at $5.56 and 150 RSHYY at $1.536/Sold RSH and LF for Losses/FISI, FNB, MBVT, HBAN, WTBA, CBU, WASH, TRST, CCNE, CZNC

Closing Prices Last Friday:
^IXIC: 4,075.56 -72.78 (-1.75%) : NASDAQ Composite
^RUT: 1,123.03 -21.32 (-1.86%) : Russell 2000
KRE: $38.77 -0.52 (-1.32%) : SPDR S&P Regional Banking ETF
VNQ: $72.07 -0.28 (-0.39%) : Vanguard REIT ETF
PFF: $39.24 +0.08 (+0.20%) : iShares US Preferred Stock ETF

The regional bank and lottery ticket basket strategies are updated on the last Monday of each Month. The price shown in the following tables will be from last Friday.

Last Update: Stocks, Bonds & Politics: Update for Lottery Ticket, Equity REIT and Regional Bank Basket Strategies/RFMD/Bought in LT Basket: 30 ARCO at $9.03, 30 CYS at $8.58/Cash Flow Main Taxable Account 3/31

I frequently use a basket approach, particularly with industry sectors, that will vary in size as to the number of components. The focus will be on the total return of the basket, rather than individual components. Some of the advantage to this approach include diversification and risk mitigation. I am not concerned about a few mishaps provided other components are doing better than I anticipated when I made the initial purchase. As noted previously, I have been surprised by some of best and worst performers in the regional bank basket.

I will periodically include an update of the REIT Common and Preferred Stock Basket. I recently published the first table of a recently initiated basket featuring equity REIT common and preferred shares. Stocks, Bonds & Politics: Equity REIT Common and Preferred Stock Table as of 3/5/14

1. Update of Lottery Ticket Basket Strategy 

The Lottery Ticket Basket Strategy uses a deep contrarian value strategy, appropriately characterized as catching a "falling knife". A common criteria for the stocks contained in this basket is a smashed stock price at the time of purchase and an ugly looking chart, though I may occasionally buy one who does not fit those common criteria. Any technical analyst would most likely have a sell rating on the stock.

See 2004 Study by the Brandes Institute: "Falling Knives Around the World" 

Selections are made primarily on statistical criteria including price to book, price to sales, forward P/E, cash per share and/or free cash flow. I spend anywhere from thirty minutes to an hour researching a potential purchase prior to purchase.

For many selections, I may be pessimistic about the firm's future, but not as pessimistic as the market. I will also occasionally see a ray of light at the end of a dark tunnel. Since I expect failures, which are inevitable and unavoidable in this kind of approach, I limit my exposure to $300 per stock plus any prior trading profits. 

After experiencing some success with this strategy, I now have a requirement that my total investment in all LT holdings can not exceed my total realized gains for this basket strategy. My total exposure is currently slightly under $6,000.

The name of the strategy aptly describes the risk. It is somewhat analogous in many cases to playing a hand of blackjack for the purchase amount knowing that the card count favors the house. It is a form of entertainment and an alternative to a casino visit. Based on the results to date, this strategy is far more likely to produce positive results even with the LB's skill at the tables. The primary purpose of the LT strategy is to entertain Right Brain, let it swing for the fences with up to $300, and to keep the Nit Wit from interfering with Left Brain's management of Headknocker's portfolio.

Snapshots of realized gains can be found at the end of the Gateway Post on this topic: Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

Net Realized Gains: $14,024.

Click to Enlarge:

Lottery Ticket Basket as of 4/25/14
Leading Unrealized Gains as of 4/25:

AMOT remains in first place:

AMOT 88.82%
FCE/A at +57.87% and FCF at 40.9%
ING +50.43%
RFMD +49.65% (fell 6.44% last Friday; only buy this year in top 5 unrealized gains)
New Entrant:

Alumina (AWCMY) +40.98%
A. Bought 150 of RSHYY at $1.536 (see Disclaimer): RB went way off the reservation and into outer space with this buy.

RB has a fondness for hydroelectric power plants, clean energy and all of that stuff, and it apparently did not matter to the NIT WIT that the RSHYY power plants are located in Russia (soon to be renamed PutinStein), and the ordinary shares are priced in depreciating Rubles.

Snapshot of Trade:

RusHydro JSC is a Russian company that owns hydro-electric plants in the motherland which immediately required the LB to categorize this stock as a Lottery Ticket. According to the profile at the pink sheet exchange, RSHYY is the largest hydro-generating company in Russia and the second largest in the world.

LB refused to do any research, noting that it was too dangerous to visit any website in Russia and highlighting the recent experiences of unsuspecting foreigners who used their cellphones during the winter Olympics. Within a few minutes, the phone would be infected with all kinds of viruses. CNET (some disputed those reports, but I had no trouble believing them) So, since I could not find any earnings reports available outside of the Russian Federation, I did not review any.

Instead, I simply made the selection based on statistical data found at YF:

RSHYY Key Statistics as of 4/9/14
TTM P/E: 7.68
P/S: .56
P/B: .31
Operating Margin (ttm): 17.71%

I was not looking for a Russian company to buy as a LT. I simply read at an article published by, who quoted a "savvy" money manager who identified this company as one poised to double or triple. The article references that analyst estimates compiled by FactSet show earnings per share rising from 9 rubles in 2014 to 13 rubles in 2016. Assuming that estimate is based on the ADR per share, rather than the ordinary share E.P.S., and that is not clear, the USD 2016 E.P.S. for the ADR would be about $.3645 at the 4/9/14 exchange rate or around a 4.225 P/E.

I am okay with refusing to review reports which may be available at this firm's website, since I would not place much faith in them anyways. Vlad has created a state built on "cronyism and Kleptocracy", as noted by The Washington Post, and that kind of economic system is not run for the benefit of shareholders or average citizens.

And, it is well known what happens to a company that upsets Vlad. Tax problems will be discovered capable of sinking the company who has offended Putin, and there is no protection from a compliant judiciary who would never challenge the official line. One only need to remember what happened to Yukos.

Another problem is that the perpetual mismanagement of the Russian economic system is causing a devaluation of the Ruble against the USD. USD/RUB Currency Conversion Chart Russia is like Argentina, where the ruling elite has found myriad ways to keep the nation from ever coming close to its potential.

I did translate Rubles into USDs before entering the order. Each ADR equals 100 ordinary shares. The ordinary shares closed on the day of my purchase at .55 Rubles.Federal Hydro-Generating Company RusHydro OAO (HYDR.MM) So, I converted 55 Rubles into USDs and came up with a $1.54 price for the ADR:

Needless to say, I would not view the Ruble as a desirable store of value, and there is considerable risk without question that its value may continue to slide against all major currencies including the USD. A further decline in the RUB versus the USD after my purchase will be reflected in the USD price of RSHYY. Russia is a terribly mismanaged country.

B. Bought 50 RSO at $5.56 (See Disclaimer):

Snapshot of Trade:

Resource Capital Corp. (RSO) is a paper REIT that primarily focuses on "originating, holding, and managing commercial mortgage loans and other commercial real estate-related debt and equity investments". Risks associated with those companies are both numerous and significant, as shown in RSO's long summary of them starting at page 17 of its recently filed 2013 Annual Report: RSO-2013.12.31-10K  Paper REITs had an awful 2013 which is reflected in the ETF REM chart, which is not adjusted for dividend payments: iShares Mortgage Real Estate ETF Chart

Resource Capital Corp. (RSO) Dividend Date & History -

If I assumed a continuation of the current $.2 per share quarterly distribution, which does not appear to be a reasonable one to me at least, then the dividend yield at a total cost of $5.56 would be about 14.39%.  A reduction to $.15 would equate to a 10.79% yield at the $5.56 total cost number.

I own 150 shares of RSO's cumulative equity preferred shares. I last discussed this REIT when buying 50 shares of  RSOPRA: Item # 6 Bought 50 RSOPRA at $23.79 (3/24/14 Post)

The common shares have a higher current yield, but it would not be surprising to see a dividend cut based on the current payout of per share and the last earnings for the Q/E 12/31/2013. Adjusted FFO for 2013 was $.74 per share and RSO paid out $.8 per share in dividends.

3. Sold 40 RSH at $1.79 (see Disclaimer): LB wanted to emphasize that this is what happens when RB is allowed to do anything without adult supervision:

Snapshot of Loss
20l4 Sold 40 RSH -219.91
I just gave up on this one.

4. Sold 40 LF at $6.76  (see disclaimer): 

Snapshot of Loss:

2014 LF 40 shares -$45.11
Bought 40 LF at $7.49 (November 2013)

I simply view the trend toward lower cost tablets with more free or lower cost programs for children to be a major headwind for LeapFrog.

I netted $199.1 on a prior 100 share flip. Sold 100 LF at $10.01 (6/15/13 POST)

I will quit while I am ahead.

Staff here at HQ has noted that the RB has tilted the recent LTs buys toward those producing income and slightly away from non-income producing LTs like RSH and LF.

2. Update for REIT Common and Preferred Stock Basket:

The REIT basket held up well last Friday, declining only $135.85 or .18%, slightly better than the VNQ decline of .39%.

This basket continues to expand, though there have been some preferred stock deletions under the current trading guidelines. The first publication of this basket was made on 3/5/14: Stocks, Bonds & Politics: Equity REIT Common and Preferred Stock Table as of 3/5/14 I am using a blended strategy of including both common and preferred stocks. I have also recently initiated a starter type position in VNQ which can be bought commission free in my Vanguard brokerage account. I am not discussing most of those small ETF adds.

Since the last update on 3/31/14, I have deleted a few preferred stock holdings in this basket:

Sold 50 AREPRE at $24.8-Regular IRA;

Sold: 50 NNNPRD at $24.06

I have added some common stock positions and one preferred stock:

Bought 200 Northwest Healthcare REIT at C$9.79;

Bought 200 KMP:CA at C$10.16;

Bought 100 ARCPP at $22.76;

Bought: 100 CSG at $7.73 and 100 Cominar REIT at C$18.14

The table also reflects some additions and one deletion that will be discussed in subsequent posts. The two additions are Canadian REITs. The deletion was SLGPRI. 

Click to Enlarge:

REIT Basket as of 4/25/14
This table does not include one of two recently added Canadian REITs.

3. Update for Regional Bank Basket Strategy:

This strategy is explained in my Gateway Post on this topic:

There were no positions sold or added since the last update. 

Snapshots of realized gains and losses can be found at the end of that post.

The dividend yield showed in this table is calculated by Yahoo Finance based on last Friday's close. My dividend yield for each position will be different based on my total cost numbers. In most cases, with FNFG and VLY being notable exceptions, my dividend yield will be higher.

Dividend Yields Based on Total Cost Over 5%:
NYCB: 8.44%
UBCI: 7.66%
WASH: 7.56%
TRST: 5.1%

I am not tracking reinvested dividends in the following table. The unrealized gains per holding do not include reinvested dividends.

Over the life of this basket strategy, I anticipate that the dividends will provide 40% to 50% of the total return. I am generally keeping my total exposure between $40,000 to $50,000.

I am currently about $5,000 below the lower end of that range, as shown in the table below (subtract total unrealized gain from total value shown)

Several stocks previously sold at higher prices are moving back into my fair value range. The price declines over the past few weeks have brought a few others near the upper end of my fair valuation range.

I have not been impressed with several of the 2013 4th quarter and the 2014 first quarter earnings reports from regional banks. While net interest margin has not contracted much, it is yet to show any expansion either for most banks. Chart: Net Interest Margin for all U.S. Banks - St. Louis Fed

One ETF will own several of the small cap regional banks and REITs that I own now or have owned in the past: PSCF | S&P SmallCap Financials Portfolio

In 2013, my dividend total from this basket totaled $1,932,93, up from $1,896.25 in 2012 and $1,660.57 in 2011. I will have to increase my current exposure significantly in order to exceed the 2013 amount this year.   

Regional bank stocks have declined since my last update, as interest rates started to go back down. The abnormally low rates benefited banks some when deposit yields were repriced down, but even 5 year bank CDs taken out in 2008 at higher rates have now matured, and the positive impact of that repricing is no longer present. Instead, the decline in rates compresses net interest margin. When rates were rising last year, regional bank stocks were in an uptrend based on the common belief that higher intermediate and long rates would be a net positive for them, particularly when short terms were likely to remain near zero through mid-2015 and then rise slowly and modestly in 2016-2017. The rate spike starting last May impacted intermediate and long term rates. Short term rates remained anchored by ZIRP. 

The SPDR S&P Regional Banking ETF closed at $42.15 on 4/1/14. KRE closed last Friday at $38.77, or an 8% decline since 4/1/14. It looks like this sector will be in correction territory soon.

The problem is highlighted by regional bank earnings for the first quarter. Money center banks have sources of income that are not meaningfully available to small banks whose bread and butter primarily involves taking deposits and lending those funds to small businesses and individuals. 

A story last week in the noted that new home loans, an important lending activity for smaller banks, fell to a 14 year low during the first quarter. The refinancing tsunami has just about run its course.

Realized Gains: $15,808.58
Dividends Computed Annually Only 2010-2013: $6,623.72 

Click to Enlarge:
Regional Bank Basket as of 4/25/14
 A. Citizens & Northern (CZNC): The 2014 first quarter report for this small PA bank is about what I expected given the current conditions. Net income was reported at $4.288M or $.34 per share, unchanged from the 2013 first quarter. SEC Filed Press Release

Data Taken from ex99-2
Net Interest Margin: 3.89% (down from 4.18% in 2013 1st quarter)
ROA: 1.41% (above average)
ROE: 9.41% (prefer over 10%)
Tangible Book Value Per Share: $13.9

The decline in net interest margin highlights the problem.

The capital ratios are very high, but the NPA ratio increased to 1.44% from .83% in the year ago quarter. The increase in NPA was due to two large commercial loans going into non-accrual. Needless to say, that is a negative. An investor wants to see both the NPA and NPL ratios declining as the economy improves.

Ratios: 2014 1st Q vs. 2013 1st Q
The dividend yield is good at the current quarterly rate of $.26 per share. Citizens & Northern Corp (CZNC) Dividend Date & History - While the payout ratio is high, the bank has a large capital cushion as shown in the preceding snapshot.

B. CNB Financial (CCNE): CNB is another small bank based in PA and had a better report than CZNC.  SEC Filed Press Release

2014 1st Q vs. 2013 1st Q:
E.P.S.: $. 36 / $.34
Net Interest Margin: 3.79% / 3.41% (a notable increase)
ROA= .97% (okay, prefer over 1% or higher)
ROE: 11.97% (fine)
Net Charge Offs-Total Loans: .18% / .47% (good to go down)
NPA Ratio: .62% / .93% (better)
Total Risk Based Capital Ratio: 14% / 15.53%
Tangible Common Equity/Tangible Assets: 6.7% / 7.51% (a negative)

C. Washington Trust: WASH reported net income of $9.3M or $.55 per share for the 2014 first quarter, up from $.45 in the 2013 first quarter. The consensus was for $.57 per share.

SEC Filed Press Release
Net Interest Margin: 3.34%, up from 3.24% in the 2013 4th quarter
NPA Ratio: .45%
Coverage Ratio: 199.23%
ROA: 1.17%
ROE: 11.1%
ROTE: 13.7%
Tangible Equity to Tangible Assets: 8.7%
Total Risk Based Capital Ratio: 13.56%

My largest unrealized percentage gain is in my remaining 50 WASH shares: Bought 100 WASH at $15.26 (January 2010)-Sold 50 of 100 WASH @ $22.44 (January 2011)

The current E.P.S. estimate for 2015 is $2.51.

D. TrustCo Bank Corp of New York: TRST reported net income for the 2014 first quarter of $11M, up from $9.2M in the 2013 first quarter. SEC Filed Press Release

E.P.S.= $.116, up from $.113
Net Interest Margin: 3.13%
Efficiency Ratio: 51.28%
ROA: .99%
ROE: 12.09%
NPA Ratio: 1.18%
Annualized Charge-Offs=.3%
Coverage Ratio: 104.7%
Tangible Equity Ratio: 8.11%
Branches: 139

Earnings Call Transcript - Seeking Alpha

E. Community Bank System (CBU): Community Bank System reported net income of $22.2M, up 9.5% from the year ago quarter. E.P.S. increased to $.54 from $.5. The consensus estimate was for $.52. Net interest margin increased to 3.94% from 3.86%, while the efficiency ratio decreased to 59.2% from 60.3%.

CBU Analyst Estimates

Earnings Call Transcript - Seeking Alpha

For a bank, CBU has a good dividend history. Community Bank The dividend was not cut during the last recession. The quarterly dividend did remain at $.22 from the 2008 third quarter through the 2010 first quarter. The dividend has been raised $.0438 per share in 1986 to the current rate of $.28 per share, without any cuts during that period. Recently, the bank has been raising the dividend in the third quarter.

Bought 50 CBU @ $23.18 (October 2010)

F. Merchants Bancshares (MBVT): Earnings Release: Merchants Bancshares, Inc. Announces First Quarter 2014 Results, Loans Up 6% From March 31, 2013

This was an overall lackluster report with E.P.S. declining to $.54 from the $.57 per share reported in the 2013 first quarter. The current quarter included a $171,000 expense or $.02 per share relating to the conversion of the "core banking systems" which will end up costing about $1.21M this year. So earnings were down before this item and will suffer for the remainder of the year also. I will just forget about this year. I own 50 shares and have booked a profit already on another 50 share lot. Item # 5 Bought 50 MBVT at $26.25 (5/2/2012)(snapshot of prior profit at $160.1)SOLD 50 MBVT at $26.5-Bought 50 MBVT at $22.9 (April 2010)

The ratios continue to be good, with the NPL and NPA ratios being exceptionally good:

The current quarterly dividend is $.26 per share. Dividends-Merchants Bancshares

G. FNB: F.N.B. Corporation reported net income of $32.2M or $.2 per share, up from $.18 in the 2013 first quarter.The consensus estimate was for $.19 per share. The E.P.S. consensus for 2014 is $.84 and $.94 in 2015. Organic commercial loan growth increased by 9.8% annualized.

Net Interest Margin: 3.62%
Efficiency Ratio: 58.99%
ROA: 1%
ROTA: 1.11%
ROE: 7.64%
ROTE: 15.26%
NPL Ratio: .8%
NPA Ratio: .85%
Coverage Ratio: 134.88%
Charge Offs: .23%
Total Capital Ratio: 12.6%
Payout Ratio: 62%

Earnings Call Transcript - Seeking Alpha

After selling off my higher cost shares profitably, I was left with a 50 share lot using FIFO account bought at $7.8. Bought 50 FNB at $7.8 July 2010 I later added another 50 share lot in June 2013: Bought 50 FNB at $11.25

H. West Bancorp: For the 2014 first quarter, WTBA reported diluted E.P.S. of $.27 per share. The consensus estimate was for $.25. The Texas ratio was excellent at 6.99%. The tangible equity to tangible asset ratio was at 8.47%.

Net interest margin=3.64%
NPL Ratio: .26%
NPA Ratio: .65%
Total Capital Ratio=13.61% (consolidated)


WTBA increased its quarterly dividend to $.12 from $.11. West Bancorporation  Increases Quarterly Dividend 2nd Time In Past 12 Months

Bought 100 WTBA at $11.67 (6/29/13 Post)

I. Financial Institutions: FISI reported first quarter net income of $7.2M or $.5, up from $.42 in the 2013 1st quarter. Financial Institutions, Inc. Announces 19% Increase in First Quarter Earnings 

Net Interest Margin: 3.52%
Efficiency Ratio: 56.96%
NPL Ratio: .88%
NPA Ratio: .56%
Coverage Ratio: 167%
ROA: .99%
ROTE: 14.3%
Total Capital Ratio: 12.14%
Tangible common equity to tangible assets: 6.6%
Payout Ratio: 38%

Financial Institutions, Inc. (FISI) Dividend History

Bought 50 FISI at $15.55 (4/17/12 Post)

Added 50 FISI at $19.8 (8/30/13 Post)-Item # 5 Sold 50 of 150+ FISI at $21.26 (10/13/13 Post)

Added 50 FISI at $18.8 (9/30/13 Post) 

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