Monday, May 26, 2014

Updates for the Regional Bank, REIT and Lottery Ticket Basket Strategies/ Bought 50 ONB at $13.29/Bought 30 MGIC at $7.9/BHB Stock Split

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 4/28/14: 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

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 advantages 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 5/23/14
The leading unrealized percentage gain continues to be AMOT:

AMOT Unrealized % Gain as of 5/23/14=113.21%
Allied Motion Reports Record Results for the Quarter Ended March 31, 2014
AMOT Closing Price 5/14/14 Day of Earnings Report: AMOT: $12.19 +0.69 (+6.00%)

A. Iridium: The market liked IRDM's first quarter report, and the surge in the stock price brought me back into profit territory:  SEC Filed Press Release

Closing Price 5/1/2014: IRDM: $7.61 +0.94 (+14.09%)

Subsequently, the stock dipped when Iridium announced that it was selling over 7 million shares at $5.795 per share to the underwriters: Form 8-K The underwriter price to the public was $6.1 per share. The underwriters had an option to purchase up to another 1.1+M shares. Iridium Announces Pricing of Common Stock and Series B Preferred Stock

The price remained above $6 per share after that announcement and has subsequently recovered. IRDM Historical Prices

Closing Price 5/23/14: IRDM: $7.55 +0.10 (+1.34%)

B. Banco Santander Brazil: On 4/29/14, BSBR stock rose 13.84% in response to an offer made by Santander to acquire the remaining 25% stake from minority shareholders. If accepted, BSBR shareholders will receive .7 shares of Banco Santander (SAN) for each BSBR ADR share. SEC Filed Document

Closing Price 4/29/14: BSBR: $6.58 +0.8 (+13.84)

Since I already own Santander's common, I will probably just take the .7 SAN offer for each BSBR share. The offer is currently being evaluated.

After I bought the BSBR shares, the company underwent a recapitalization and paid out two dividends totaling $.7807 per share. I was set up to reinvest the dividend, but Fidelity paid me in cash.

Bought as LT: 40 BSBR at $6.01

Q1 2014 Results - Earnings Call Transcript | Seeking Alpha

Closing Price 5/23/14: BSBR: 6.68 -0.02 (-0.30%)

C. R. F. Micro: Rocky Holdings will be the tentative name for the company resulting from the merger of R.F. Micro and TriQuint Semiconductor (TQNT). S-4

Rocky Holdings will be a major component supplier for Apple and Samsung phones.

Both RFMD and TriQuint recently reported better than expected earnings. For its fiscal 4th quarter ending 3/29/14, RFMD reported non-GAAP E.P.S. of $.12 on $288.5M in revenues and forecasts non-GAAP E.P.S. of approximately $.17 in the current quarter.

Earnings Call Transcript | Seeking Alpha

Bought as LT: 50 RFMD at $5.18 (12/31/13 Post)

RFMD has just about doubled in price during 2014 so far. RFMD Interactive Chart

Closing Price 5/23/14: RFMD: $9.45 +0.19 (+2.05%)

D. Bought 30 MGIC at $7.9 (see Disclaimer): 

Snapshot of Trade:

Any small technology company is automatically assigned to the LT category. There is nothing in my background that would allow me to make an intelligent assessment about the products and services offered by a company like Magic Software. There is nothing that I could say about this company that would be worth anything.

The buy was made primarily on statistical criteria:
MGIC Key Statistics (Based on $7.83 Share Price and Earnings Through Q/E 3/2014)
Forward P/E: 14.29
5 Year Estimated P.E.G: 1.7
P/B: 1.68
Return on Equity: 11.76%
Cash Per Share: $2.2
Dividend Yield (before Israel's withholding tax):  3.1%

Magic Software Enterprises (MGIC) is an Israeli based company that is a "global provider of mobile and cloud-enabled application and business integration platforms". For the 2014 first quarter, the company reported non-GAAP earnings of $.12 per share, up from $.11. Non-GAAP operating income increased 23% Y-O-Y to $4.5M. There were more shares outstanding in the current quarter due to an offering made earlier this year which knocked that the share price some. SEC Filing

The company closed an offering of 6.9M shares at $8.5 per share. SEC Filing

This stock was on my LT monitor list. I happened to notice a decline in price during early May and decided to tip my toe into the water. The stock was selling above its 200 day SMA and below its 50 day SMA. The share price hit $9.6 last February: MGIC Interactive Chart

The current E.P.S. forecast is for $.49 in 2014 and $.55 in 2014. MGIC Analyst Estimates

Closing Price 5/23/14: MGIC: $7.99 +0.13 (+1.72%)

2. Update for REIT Common and Preferred Stock Basket:

Added: I discovered on 6/10/14 that I had not been including 50 HCP in the following table. I have corrected that omission which will be reflected in the next updated table. Bought 50 HCP at $36.31 (12/31/13 Post)

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 4/28/14, I have deleted a few preferred stock holdings in this basket:

Sold Roth IRA: 50 DREPRL at $24.93/Paired Trade: Sold 100 ARCPP at $23.43 and Bought 300 ARCP at $12.69/Sold 100 DLRPRG at $21.55 (5/10/14 Post)

Sold 50 SLGPRI at $23.6 (5/3/14)

There are some preferred stock eliminations that have not yet been discussed: CBLPRE and OFCPRL.

The table also reflects common stock additions and deletions that have not yet been discussed.

I have discussed adding these common stock position

Bought 300 ARCP at $12.69 (5/10/14)-Sold 100 of 400 ARCP at $13.35 (5/17/14 Post)(net add of 300 shares)

Bought: 100 HLP_UN:CA at C$10.17 and 100 American Hotels at C$10.05 (5/3/14 Post)

I also added for ETF for international diversification in this sector: Bought 50 IFGL at $31.27 (5/24/14 Post)

I am picking up higher yields with the common shares. The ARCP common had a higher yield than its preferred at the prices noted above. The Canadian REITs have over 8% yields. The equity preferred stocks were yielding less than 7% at the sales' prices noted above.

Click to Enlarge:

EQUITY REIT Common and Preferred Stock Basket
3. Update for Regional Bank Basket Strategy:

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

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%
CCNE: 5.86%
CZNC: 5.39%
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 near the lower end of that range after several small adds since my last update.  

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

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. 

For several small banks more dependent on mortgage originations, the uptick in rates last year hurt their mortgage origination business and caused Y-O-Y declines in earnings. 

There were no sells since the last update. Including the purchase of ONB discussed below, I have previously discussed the following minor adds since the last update: 

Bought 50 FNLC at $15.6 (5/24/14 Post)

Bought  50 CZNC at $18.5 (5/17/14 Post)

Bought: 50 BPFH at $12.35, 50 TRMK at $22.73 (5/10/14 Post)

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

Click to Enlarge:

Regional Bank Basket as of 5/23/14

The regional bank basket outperformed the regional bank ETF KRE last Friday. My basket was up .83% while KRE closed at  38.14 +0.18 (+0.47%).

This year has been a tough one so far for regional banks.

Comparison Data From the St. Louis Fed:
Net Interest Margin for all U.S. Banks
Net Interest Margin for U.S. Banks with average assets under $1B
Net Interest Margin for U.S. Banks with average assets between $1B and $15B
Return on Average Equity for all U.S. Banks   (abbreviated to "ROE")
Return on Average Assets for all U.S. Banks (abbreviated to "ROA")
Nonperforming Loans (past due 90+ days plus nonaccrual) to Total Loans for all U.S. Banks (abbreviated to "NPL ratio")
Charge-Off Rate On All Loans, All Commercial Banks
Assets at Banks whose ALLL exceeds their Nonperforming Loans (coverage ratio over 100%)(ALLL=Allowance for loan losses)

A. Berkshire Hills: Berkshire Hills Reports reported core earnings of $.42, up from $.40 in the year ago period. The consensus estimate was for $.4 per share.

Net Interest Margin: 3.35%
Efficiency Ratio: 64.42%
NPL Ratio: .6%
NPA Ratio: .46%
Charge Offs Annualized: .3%
Coverage Ratio: 132%
ROTE: 10.84%

After selling 50 BHLB shares at $28.74 (+$338.12), I reinitiated a 50 share position at $24.51 last February. I am now in the red for those shares.

2015 E.P.S. Estimate: $1.87 BHLB Analyst Estimates

Closing Price Last Friday: BHLB: 22.67 +0.12 (+0.53%)

B. Bridge Bancorp: Bridge Bancorp reported core E.P.S., which excludes acquisition related expenses of $.35 per share, up from $.32 in the year ago quarter. The consensus estimate was for $.28.

Financial Data 2014 1st Q vs. 2013 1st Q
The following numbers are excellent:

NPL Ratio: .33%
NPA Ratio: .18%
Coverage Ratio: 431.22%

The capital ratios remain good:

After selling my higher cost shares profitably, I currently own 109+ shares at an average cost of $19.05 per share (see snapshot at Item # 4  Pared BDGE Selling Highest Cost 56 Shares at $24.71)

Closing Price Last Friday: BDGE: $24.15 +0.22 (+0.92%)

C. NBT Bancorp: NBT Bancorp reported core net income of $18.4M for the 2014 first quarter or $.42 per share, up from $.39 in the 2013 first quarter.

Net Interest Margin: 3.68%
NPL Ratio: .99%
NPA Ratio: .73%
Coverage Ratio: 128.19%
Charge Offs Annualized: .27%
ROTE (core): 14.48%
Total Risk Based Capital Ratio: 13.06%

Subsequent to 3/31/14, NBT also noted that one of its wholly owned subsidiaries sold its 20% ownership interest in Springstone Financial, acquired for $3M. to LendingClub who acquired all of Springstone's outstanding equity for $140M in cash and preferred stock, or $28M for a 1/5th ownership interest.

Closing Price Last Friday: NBTB: $22.79 +0.21 (+0.93%)

D. First Financial: First Financial Bancorp reported first quarter net income of $15.1M or $.26 per share, up from $.24 in the year ago quarter. Loans, excluding "covered loans", rose 12.6% on an annualized basis. Covered loans are subject to a loss sharing agreement with the FDIC. FFBC acquired two failed banks in 2009 through FDIC assisted transactions. (page 2 2013 Form 10-K) FFBC currently has 106 banking centers in Ohio, Indiana and Kentucky.

Net Interest Margin: 3.82%
NPA Ratio: .95%
Charge Offs Annualized: .23%
Coverage Ratio for Nonaccrual Loans: 121.76%
Adjusted ROA: 1.02%
Adjusted ROTE: 11.13%

The capital ratios remain good:

Earnings Call Transcript - Seeking Alpha

Between the 2011 third quarter through the 2013 4th quarter, FFBC paid a special quarterly dividend that resulted in paying out 100% of net income. The regular dividend is currently $.15, up from $.12 during the period when FFBC was paying that special dividend. Stock Splits & Cash Dividends | First Financial Bank

After profitably selling my highest cost shares, I currently own 137+ shares at an average cost of $14.84. Item # 4 Sold 57 FFBC at $17.03-Highest Cost Shares The current dividend yield based on that total cost number is 4.04%.

Closing Price Last Friday: FFBC: $16.16 +0.16 (+1.00%)

E. United Bankshares: United Bankshares reported first quarter net income of $30.1M or $.48 per share up from $.43 in the 2013 first quarter.

Net Interest Margin: 3.7%
Efficiency Ratio: 50.92%
NPL Ratio: 1.11%
NPA Ratio: 1.18%
ROA: 1.14%
ROE: 8.57%
Total Capital Ratio: 13.3%

Item # 2 Bought 50 of UBSI at $16.56 (November 2009 Post)

The current quarterly dividend is $.32 per share: United Bankshares, Inc. (UBSI) Dividend History

Closing Price Last Friday: UBSI: $29.76 +0.18 (+0.61%)

F. New York Community: New York Community Bancorp reported cash earnings of $.29 per share and GAAP earnings of $.26 per share.

The current quarterly dividend is $.25 per share. New York Community Bancorp, Inc. (NYCB) Dividend History Given the payout ratio, a dividend cut is certainly a possibility.

I currently own 150 shares after paring my position: Added 50 NYB at $12.79 (February 2012) and two trades from October 2009: Bought 50 NYB at $11.3 and Added 50 NYB at $11

I have sold 100 shares, with the largest gain ($331.02) realized on a 50 share lot. Sold 50 NYB in IRA at $17.51-Added 50 NYB at $10.57

Earnings Call Transcript - Seeking Alpha

Closing Price Last Friday: NYCB: $15.35 +0.07 (+0.46%)

G. Bought 50 ONB at $13.29 (see Disclaimer):

Snapshot of Trade:

Old National Bancorp (ONB) is the largest financial services company headquartered in Indiana and is among the top 100 banking companies in the U.S.

I have previously bought and sold Old National Bancorp twice as part of the regional bank basket.

Item # 1 Sold 50 ONB at $14.12 (7/6/13 Post)(snapshot of profit=$95.13)-Item # 4 Bought Back 50 ONB at $11.9 May 2013

Item # 1 SOLD 100 ONB at $13 (August 2012)(snapshot of profit=$99.07)-Item # 4 Bought 100 ONB at $11.85 (5/24/12 Post)

Total Realized Trading Gains=$194.2

My only observation about the foregoing history is that my last purchase was at least below my last sale's price.

I decided to repurchase shares after reading the 2014 first quarter earnings report. ONB reported net income of $26.5M or $.26 per share, up from $.24 in the 2013 first quarter.

Net Interest Margin: 4.22% (good)
Efficiency Ratio: 67.77% (ex item: 65.81%)(needs to go below 60%)
NPL Ratio: 2.15% (viewed as too high, down from 2.31% as of 12/31/13)
Coverage Ratio: 41.5%  (excludes FDIC covered loans)
ROA: 1.12%
ROE: 9.03%
Tangible Equity to Tangible Assets: 8.82%
Charge Offs: (.02%) (i.e. a net recovery)

The capital ratios are good:

The Board declared the regular $.11 per share quarterly dividend.

At that quarterly rate, the dividend yield at a total cost of $13.29 is about 3.31%.

2014 1st Q 10-Q

2013 Annual Report SEC Form 10-K (historical financial data for 2009-2013 at page 27)

As of 12/31/13, ONB had 169 "branches and financial centers".

ONB SEC Filings

The consensus E.P.S. as of 5/18/14 was $1.05 for 2014 and $1.17 for 2014. ONB Analyst Estimates At a total cost of $13.29 per share, the forward P/E based on that 2015 estimate is about 11.36

Closing Price Last Friday: ONB: $13.73 +0.01 (+0.07%)

H. Bar Harbor: I received 25 shares in a 3 for 2 stock split, and now own 75 shares:

Bought 50 BHB at $30 (adjusted to $20 per share post split)

Snapshot of Position with Revised Adjusted Cost:

75 Shares of BHB-Average Cost Per Share=$20.11
Closing Price Last Friday: BHB: $25.76 -0.29 (-1.10%) 

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