There's Hope

[dealraker]

In about 1994 Outstanding Investor Digest did an interview with a guy who recommended buying shares of Cathay Bancorp, a California bank that served mostly the Asian-American (mostly Chinese-American) population.   Southern Cal at that time had massive fires, huge earthquakes, its own awful recession, riots in the streets. and of course OJ Simpson was in the news.  The banks in Cal were getting slaughtered both in operations and stock prices.

 

Still Cathay had a 20% return on equity and was selling for...(this people is simply incredible)...book value.  All while...

 

...on the east coast Mr. Eddie Crutchfield, we used the term Klutzfield, the cigarette smoking CEO of First Union was out in public stating that he could "using the accounting that we employ we can pay 5 times book value for a community bank and make it work".  Yes, Fast Eddie could pay, and did pay, 4-5 times book value for community banks earning 10% on equity and make it accreditive to earnings via the great flush of equity and past/present/AND FUTURE expenses right out the old drain!  

 

First Union had an interesting game back then and it displayed itself pefectly clear in its financial statments.  Remember Buffett says, "A librarian can read the numbers, but it isn't the figures that count, it is what they mean."  So Fast Ed had a near 30 percent return on equity because everything was flushed in one-time charges that analysts uniformly stated "did not count" and years-years-and years of (YOU GUESSED IT!) zero book value growth.  Red flags?  To me a screaming YES; to bank analysts?  No problem.

 

So local banks including the dominant one in my town (that I inherited stock in decades earlier) were getting 10-12% on equity and selling for (OH MY LORD!!!) 4 times book value!  Yep that's the truth and nuthin' but the truth.

 

Hmm....anybody picking up on the game Eddie played?  

 

So my local dominant bank that sold for 4 times book at $25 per share eventually settled for something in the $7 range as Cathay and others in the Asian American California world got things going once fires/quakes/riots/recessions/and OJ cooled down and soared.  Then came the financial crisis of course.  I said to myself, "The two years before he joined Buffett at Berkshire Munger had 30-something percent declines in his mostly financial stock portfolio."  Yep, my faith was in shake-down mode...while I said to myself, "Hell, I'm Charlie."  Charlie is my first name.

 

We survived.  I've owned both Cathay and East West since their origin on the exchanges.  But I have not bought a bank stock since East West came public  in the year 2000.  Again, for you stats people, East West came public, no economy issues at this time around Y2K, at book value while earning 20% on equity.  THAT my friends is near guaranteed success.

 

But to cut to the HOPE of the matter, a few days ago me and several members of my family who have invested in these southern Cal based Asian American institutions all bought shares of Hope Bancorp, symbol HOPE.  We bought because a family member (we are a partially Asian American family from souther Cal) works as a bank analyst in that area and a large shareholder was wanting to bail at basically any price.  So we paid about $12.75 for some shares, it wasn't a small outlay for us.

 

Hope serves mostly a different Asian American population than does Cathay and East West (they also serve mostly different populations too).  And Hope doesn't have the very successful history of Cathay and East West.  Still these banks are treated with incredible respect by their managements and community.  It is far different than in Asia itself, and different than in the US too actually, it is a special culture.  Failure is not an option in their eyes.

 

Hope, the stock, has moved up a tad.  But it is still about 7.5 times earnings.  I look for both loan growth and growing but relatively low loan losses for a few years going forward now.

 

I post this just for stimulation, to give something different to think about.  We can't Facebook/Google 24/7 or at least I can't.   Banks are as ignored as I've ever seen them today compared to other stuff.  

 

These banks are treated with the upmost respect by management

Edited November 1, 2022 by dealraker
clarify

[boilermaker75]

and they are charging >6% for loans and <<1% for your money. I've been writing a lot of puts on WFC and BAC for several months.

[CorpRaider]

Mike Mayo was on Bloomberg yesterday.  Opined that banks might actually grow earnings through this recession.

[Dinar]

1 hour ago, dealraker said:

In about 1994 Outstanding Investor Digest did an interview with a guy who recommended buying shares of Cathay Bancorp, a California bank that served mostly the Asian-American (mostly Chinese-American) population.   Southern Cal at that time had massive fires, huge earthquakes, its own awful recession, riots in the streets. and of course OJ Simpson was in the news.  The banks in Cal were getting slaughtered both in operations and stock prices.

 

Still Cathay had a 20% return on equity and was selling for...(this people is simply incredible)...book value.  All while...

 

...on the east coast Mr. Eddie Crutchfield, we used the term Klutzfield, the cigarette smoking CEO of First Union was out in public stating that he could "using the accounting that we employ we can pay 5 times book value for a community bank and make it work".  Yes, Fast Eddie could pay, and did pay, 4-5 times book value for community banks earning 10% on equity and make it accreditive to earnings via the great flush of equity and past/present/AND FUTURE expenses right out the old drain!  

 

First Union had an interesting game back then and it displayed itself pefectly clear in its financial statments.  Remember Buffett says, "A librarian can read the numbers, but it isn't the figures that count, it is what they mean."  So Fast Ed had a near 30 percent return on equity because everything was flushed in one-time charges that analysts uniformly stated "did not count" and years-years-and years of (YOU GUESSED IT!) zero book value growth.  Red flags?  To me a screaming YES; to bank analysts?  No problem.

 

So local banks including the dominant one in my town (that I inherited stock in decades earlier) were getting 10-12% on equity and selling for (OH MY LORD!!!) 4 times book value!  Yep that's the truth and nuthin' but the truth.

 

Hmm....anybody picking up on the game Eddie played?  

 

So my local dominant bank that sold for 4 times book at $25 per share eventually settled for something in the $7 range as Cathay and others in the Asian American California world got things going once fires/quakes/riots/recessions/and OJ cooled down and soared.  Then came the financial crisis of course.  I said to myself, "The two years before he joined Buffett at Berkshire Munger had 30-something percent declines in his mostly financial stock portfolio."  Yep, my faith was in shake-down mode...while I said to myself, "Hell, I'm Charlie."  Charlie is my first name.

 

We survived.  I've owned both Cathay and East West since their origin on the exchanges.  But I have not bought a bank stock since East West came public  in the year 2000.  Again, for you stats people, East West came public, no economy issues at this time around Y2K, at book value earnings 20% on equity.  THAT my friends is near guaranteed success.

 

But to cut to the HOPE of the matter, a few days ago me and several members of my family who have invested in these southern Cal based Asian American institutions all bought shares of Hope Bancorp, symbol HOPE.  We bought because a family member (we are a partially Asian American family from souther Cal) works as a bank analyst in that area and a large shareholder was wanting to bail at basically any price.  So we paid about $12.75 for some shares, it wasn't a small outlay for us.

 

Hope serves mostly a different Asian American population than does Cathay and East West (they also serve mostly different populations too).  And Hope doesn't have the very successful history of Cathay and East West.  Still these banks are treated with incredible respect by their managements and community.  It is far different than in Asia itself, and different than in the US too actually, it is a special culture.  Failure is not an option in their eyes.

 

Hope, the stock, has moved up a tad.  But it is still about 7.5 times earnings.  I look for both loan growth and growing but relatively low loan losses for a few years going forward now.

 

I post this just for stimulation, to give something different to think about.  We can't Facebook/Google 24/7 or at least I can't.   Banks are as ignored as I've ever seen them today compared to other stuff.  

 

These banks are treated with the upmost respect by management

Thank you for the idea, do you by chance know who sold and why?  Also, are you not worried by 1) very high percentage of criticized loans?  2) impact of sharp increase in interest rates on the value of their loan book and net interest margin?

Edited November 1, 2022 by Dinar

[dealraker]

The seller was an estate and it went through the trust department.  Yes Hope will have a higher level of loan issues over time than either Cathay or East West, it is Korean and that's just the way it goes.  All taken into consideration with "hope"!  Net interest margin is generally very low at all the Asian American banks, that's their model.  Huge savings accounts, generally large relatively (to other banks) low yielding CD's are common, low efficiency ratios, an entire different model than mainstream banks.

Edited November 1, 2022 by dealraker
clarification

[Spekulatius]

@dealraker thank you for the background stories. I have heard about Cathay bancorp before and in my opinion, these minority focused banks can offer interesting investment opportunities, but the devil is always in the detail and most of the detail have to do how top management conducts the business.

 

One of the things I am struggling with is and that prevents me often from holding LT is that when the "story changes". I recent example of this is FB/META of course where the things have deteriorated substantially at this point. ideally, you want to catch unfavorable development, before the crash the stock, but what is too early and what is too late to make a decision.

 

For example, I recently sold CVS. I bought CVS in late 2020 based on the fact that it was cheap and they have some tailwinds in terms of vaccination (brings people in the store). I also liked how Karen Lynch has led Aetna (CVS health insurance business acquired a few years early). Post acquisition, CVS took a few years to "digest" Aetna and delever but pure math suggest that they could start buybacks in 1-2 years and raise the dividend, which generally is likely something shareholders appreciate with a stock that was in the doghouse for while.

Long story short, this played out pretty  much as expected, CVS executed well in the epidemic, health insurance kept growing and they raised the divdend and started buybacks. then all of a sudden they seemed on the hunt for new acquisitions of Signify health (which surprised me, but trusted management's judgement), but once they allegedly started to circle KANO health (a SPAC no less with a questionable business model), I started to question what is going on here.

 

To keep this short, I sold my CVS but first the KANO purchase didn't occur (yet?) and I do wonder, if I don't give management not enough slack here. Then on the other hand one sees stuff like FB doing a Metaverse and regret a longer leash.

 

This is probably too long of a diatribe here on a specific topic, but it's a real problem if you want to hold LT and there probably are a few differing perspectives out there. I have had a few LT holdings in my investment carrier but I think overall in 75% of the cases within 5 years something happens to most of my holdings that significantly changes my view on the business for the worse or in some lucky cases, the valuation far exceeds what I consider fair value, which leads me to sell. So my average holding period is probably only a few years (weighted by money invested) and even shorter based on average holding period for all positions (some are just trades).

Edited November 1, 2022 by Spekulatius

[Gregmal]

The descriptions here reminded me of Abacus in Chinatown I think it was. Another example of selective “justice” in NYC. 

[dealraker]

23 minutes ago, Spekulatius said:

@dealraker thank you for the background stories. I have heard about Cathay bancorp before and in my opinion, these minority focused banks can offer interesting investment opportunities, but the devil is always in the detail and most of the detail have to do how top management conducts the business.

 

One of the things I am struggling with is and that prevents me often from holding LT is that when the "story changes". I recent example of this is FB/META of course where the things have deteriorated substantially at this point. ideally, you want to catch unfavorable development, before the crash the stock, but what is too early and what is too late to make a decision.

 

For example, I recently sold CVS. I bought CVS in late 2020 based on the fact that it was cheap and they have some tailwinds in terms of vaccination (brings people in the store). I also liked how Karen Lynch has led Aetna (CVS health insurance business acquired a few years early). Post acquisition, CVS took a few years to "digest" Aetna and delever but pure math suggest that they could start buybacks in 1-2 years and raise the dividend, which generally is likely something shareholders appreciate with a stock that was in the doghouse for while.

Long story short, this played out pretty  much as expected, CVS executed well in the epidemic, health insurance kept growing and they raised the divdend and started buybacks. then all of a sudden they seemed on the hunt for new acquisitions of Signify health (which surprised me, but trusted management's judgement), but once they allegedly started to circle KANO health (a SPAC no less with a questionable business model), I started to question what is going on here.

 

To keep this short, I sold my CVS but first the KANO purchase didn't occur (yet?) and I do wonder, if I don't give management not enough slack here. Then on the other hand one sees stuff like FB doing a Metaverse and regret a longer leash.

 

This is probably too long of a diatribe here on a specific topic, but it's a real problem if you want to hold LT and there probably are a few differing perspectives out there. I have had a few LT holdings in my investment carrier but I think overall in 75% of the cases within 5 years something happens to most of my holdings that significantly changes my view on the business for the worse or in some lucky cases, the valuation far exceeds what I consider fair value, which leads me to sell. So my average holding period is probably only a few years (weighted by money invested) and even shorter based on average holding period for all positions (some are just trades).

Spekulatius my outcomes are basically no different than yours and CVS is a clear example.   First, I'll entertain you on my "genius" of getting acquainted with CVS.  My grandmother lived to 96 and in her will provided for her 2 sisters to live within her estate funds till death.  But the house next door had been owned by her sister and when her sister (my great aunt) died she left me and my sister her "back yard".  So we owned a tract of land on what should be a good commercial corner.  Anyway there was an auction when granny's sister's both were dead and I went along with the major bidder on the 3 adjoining tracks to that "back yard" I owned and sold it as part of the big tract.

 

My proceeds were $20,000.  This was 1990's.  The man who bought it all (all the tracts together) paid less than $100,000.   He immediately sold it to CVS, I mean literally within a month, for $850,000.  Yep, that's some investment genius from my family right there...a bunch of pretty astute business people who just watched $750,000 get made in 30 days...right off our backs!

 

We don't take ourselves too seriously; we chuckled.  Oh, by the way the guy who made the quick $750k?  He too was in my investment club, he owned the local super-successful hardware store and was a huge real estate investor.  He likely knew CVS was looking.

 

So anyway, I said to myself, "Any organization that can pay that much....well hell they MUST have something going on that's good."  I bought CVS stock.  As I remember, and I'm not looking at a chart here, just going off my memory....the stock went messing around for a while.  Then at some point went up tremendously, dropped 50%, then went up over $100, and the dropped like a damn rock!  And now back up some....and so forth.

 

Yep, that's my story for most of my holdings.  That is except for a very few.  I'm probably smart enough today to know better when to sell, and more so what not to sell.  But it took me almost 50 years to get here.  I am not a great investor whatsoever.  I did get lucky though and I would not have gotten lucky if I sold stuff, again the Berk's and AJG's and a couple more like NSC.

 

So honestly my bias is based on being lucky and thats about all there is to it.  

Edited November 1, 2022 by dealraker

[lnofeisone]

7 hours ago, CorpRaider said:

Mike Mayo was on Bloomberg yesterday.  Opined that banks might actually grow earnings through this recession.

That would be interesting for sure. I think banks will first lend at high rates while suffer losses. At some point, the economy starts to rebound and losses diminish and that's when earnings are going to start really coming through. My guess (hope)6-9 months. My strategy is to redeploy energy sells into banks and slowly building out few large positions in things like JOE. 

[Spekulatius]

On sector that has shown tremendous performance over the years and gets very little attention is health Insurance. My guess is that this is because of perceived policy risk and because people generally hat the product. However, look at how UNH has performed since the GFC when it traded at 8x earnings for a while. I hold some ELV (bought it as ANTM during the pandemic) and it really has performed well as a business and as stock.

 

From time to time, the sector sells off, but so far, the stocks always bounced back. From a business perspective, I think it’s important to realize that health insurers are more like service cos than insurers who actually carry risk. They are similar to title insurers that way.

 

Edited November 14, 2022 by Spekulatius

[DooDiligence]

18 minutes ago, Spekulatius said:

On sector that has shown tremendous performance over the years and gets very little attention is health Insurance. My guess is that this is because of perceived policy risk and because people generally hat the product. However, look at how UNH has performed since the GFC when it traded at 8x earnings for a while. I hold some ELV (bought it as ANTM during the pandemic) and it really has performed well as a business and as stock.

 

From time to time, the sector sells off, but so far, the stocks always bounced back. From a business perspective, I think it’s important to realize that health insurers are more like service cos than insurers who actually carry risk. They are similar to title insurers that way.

 

 

Most people don't know that when their employer "self-insures" and uses Blue Cross or another provider, the provider just administers the benefits plan and sends a bill for claims to the employer.

[Spekulatius]

55 minutes ago, DooDiligence said:

 

Most people don't know that when their employer "self-insures" and uses Blue Cross or another provider, the provider just administers the benefits plan and sends a bill for claims to the employer.

Yes. from a business perspective, the insurer retains very little risk and what little they have has a short tail, since the contracts are renewed (and repriced anualy). that means very little capital needs to retained. Then, the large players have massive economies of scale and network effects (most providers on the network is desirable for the user). Benefits  from health care inflation, demographics etc.

 

At some point this lollapalooza will reverse but people have been saying this ever since I moved to the US about 25 years ago.

[dealraker]

Well the boys met and while the initial discussion was that right now anything associated with Asia is priced well but "we don't like investing directly" there.  The theme abruptly (LOL) with a few glasses of wine or bottle of beer.

 

EEM, yep the larger fee thing, is now the name of the game.  Probably one of 10 times such a short period of owning something for us, but we sold our Hope with about a 10% gain.  

 

These decisions are made on the porch of Workman Road, a 200 year old house on hundreds of acres.  We have a 7 foot tall painted wood carving Big Foot, with a bald hind end, on the porch along with all kinds of other wood carvings such as coyote, fox, racoon, and Bobcat.  A totem pole of eastern red cedar (juniper) is in view too.  Workman is the name of the family who built the place and farmed it along with the road it is on.

 

Mention all this because these investments are more boy-bonding than serious.  But over time they've worked satisfactorily.  We are "emerging" now.  

Edited November 15, 2022 by dealraker
spelling

[Spekulatius]

33 minutes ago, dealraker said:

Well the boys met and while the initial discussion was that right now anything associated with Asia is priced well but "we don't like investing directly" there.  The theme abruptly (LOL) with a few glasses of wine or bottle of beer.

 

EEM, yep the larger fee thing, is now the name of the game.  Probably one of 10 times such a short period of owning something for us, but we sold our Hope with about a 10% gain.  

 

These decisions are made on the porch of Workman Road, a 200 year old house on hundreds of acres.  We have a 7 foot tall painted wood carving Big Foot, with a bald hind end, on the porch along with all kinds of other wood carvings such as coyote, fox, racoon, and Bobcat.  A totem pole of eastern red cedar (juniper) is in view too.  Workman is the name of the family who built the place and farmed it along with the road it is on.

 

Mention all this because these investments are more boy-bonding than serious.  But over time they've worked satisfactorily.  We are "emerging" now.  

Would love to be in one of these meetings. I am always good for a few beers or decent bottle of wine.

I do think that emerging markets should really be called "Submerging markets". I also think EEM is a terrible vehicle to play emerging markets if so inclined.

[dealraker]

1 hour ago, Spekulatius said:

Would love to be in one of these meetings. I am always good for a few beers or decent bottle of wine.

I do think that emerging markets should really be called "Submerging markets". I also think EEM is a terrible vehicle to play emerging markets if so inclined.

Agree Spek 100%!  But Jerry, the oldest of 5 (Jerry 80; Steve 75; me 68; Ted 55; Mark 44) made the decision and he was excited...and we need some positive family excitement amonst all the endless health problems now as you would expect.

 

Jerry also, some 45 years ago, was the leader of selling all but one of the builders supply businesses to buy one millwork business - to sell all the commercial and residential real estate - to go into the stock market.  My guess is within the 5 families now that's a huge addition to total net worth- that simply came with passive observation and little effort and a resulting awareness that literally is somewhat overwhelming.

 

So it is, life is great...if you can stand it.  We shall see where it goes and enjoy the conversations in the process.  By the way, to make sense of this, our parents all died in the 1960's and 70's.  Financially we had to grow up fast.  Plus there was this 2 million dollar tax penalty...and we didn't have 2 million to pay it!  

Edited November 15, 2022 by dealraker