Bank Activists Kick Off 13F Season

Most traders and investors I know get really excited about earnings season every quarter and get all caught up in the misses, beats and in-line reports and the follow-through by the stocks after companies report.

I look at earnings season as more of a snapshot of the world, and I keep track of changes in valuation of portfolio companies and look for opportunities to buy assets cheaply after big earnings misses. But it is just not a huge event for me, since I tend to measure time in years rather than days.

For me, the big quarterly event is 13F filings. These filings every quarter allow us to get a pretty good look at what money managers and hedge-fund types are buying and selling, as opposed to just what they talk about on TV. I use 13Fs to see what smart, successful value, activist and distressed investors are doing with their clients' money. I want to stress that this a starting point, not a blind coattail process. I break down the ideas I uncover, using my own criteria, before buying the stocks the big guys are buying.

Speaking of the big guys, everyone who has an Internet connection will have commentary on the moves by Bill Ackman, Seth Klarman and David Einhorn. While I will read their filings, I would not add an ounce of value to your day if I just reported the same stuff that 1,000 other people have also covered. I have been doing this a long time and know a lot of people, so I am aware of many smaller, less well-known funds and investors that have great track records and little press coverage. Finding what those folks are doing is probably a more productive use of my time and yours.

Since the deadline is Friday afternoon, many of the value managers just get it out of the way and file early. This week, I was delighted to see that what I call the "big three" bank stock activists have all filed early. These three have strong track records of discovering small banks and helping or forcing management to unlock shareholder value. Finding a small bank that fits my "trade of the decade" profile and finding one of these three as a major shareholder is like having extra birthdays during the year.

Lawrence Seidman started his small-bank activist fund back in 1994, and he has had a string of successful activist investments. In the second quarter, he made some purchases that are worth noting. He increased his stake in Franklin Financial (FRNK), a Virginia-based bank where he one of the largest shareholders. The stock is trading at just 92% of book value, and the bank has a strong presence in the Richmond market and could attract a buyer.

Seidman also opened a new position in a recent thrift conversion, Waterstone Financial (WSBF), which trades well below book value. Waterstone has nine branches just outside of Milwaukee, and it could attract a buyer.

PL Capital has become one of my favorite sources of small-bank ideas. The managers of this fund have extensive banking experience and have been able to unlock shareholder value at several banks in the past two years. In the quarter, PL Capital increased its stake in two banks where it has already taken an aggressive activist position, buying more shares of Banc of California (BANC) and Metro Bancorp (METR). The fund also bought a lot more Cheviot Financial (CHEV) an 11-branch bank in Cheviot, Ohio, that trades around 90% of book value. PL Capital is apparently finding value in Ohio, as it also opened a new position in shares of LNB Bancorp (LNBB) in Lorain, Ohio.

I have followed Joseph Stilwell for many years and still frequently see his name pop up as a major shareholder in many of the stock I buy for the trade of the decade. He has a very strong track record of forcing management to unlock value, and he has prompted more than few banks to engage in an outright sale of the institution. He was also a buyer of Banc of California and participated in the thrift conversion IPO of Investors Bancorp (ISBC) during the quarter. Most of his positions are far too small to talk about here, but he did also add to several of his microcap banks in the quarter.

None of the big three activists were extremely active buyers in the quarter. That is to be expected as the market has continued to rise. However, they all own a bunch of stocks that they bought over the past year or two that are still very cheap, including dozens of microcap and nano-cap banks that have huge potential.

Although it is time-consuming to go through all these filings to find cheap, strong community banks that these great investors own, it is worth the effort. The hours you spend doing that will pay off better than any other conceivable use of your research and trading time.

At the time of publication, Melvin was long WSBF and CHEV.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider FRNK, WSBF, BANC, METR, CHEV and LNBB to be small-cap stocks.  You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices