I'm Buying More of This Cheap Bank

My Special Situations portfolio invests in companies that are undergoing some type of huge change that creates value or makes it evident where it was obscured before. That's the case with TFS Financial (NASDAQ: TFSL  ) , a bank that has been under the cloud of a regulatory memorandum of understanding.

The portfolio already owns shares of TFS, but I'm coming back for more, in a big way, adding $5,000 to the $2,000 I've already invested. Following this, the portfolio will have more than 14% of its capital in the bank. Big investment? Sure. But this bank trades for about 55% of tangible book value, and it's profitable. So I'm making it the largest position in my portfolio by about two times.

The business
In my original buy article in March, I noted why you should love this stock:

  • Plain vanilla retail banking operation
  • Cheap stock, now marked at 55% of tangible book value
  • Consistently profitable on an annual basis throughout the financial crisis
  • Declining delinquencies and non-performing assets
  • Strong credit metrics for new loans (FICO score of 780+ with loan to value around 60%)
  • Strong potential for buybacks to drive the share price
  • Potential for a dividend initiation

Now, all of these elements remain in place today. And like then, the bank still labors under a memorandum of understanding with regulators. According to management in the April conference call, regulators want to see sustained and consistent profitability.

In the most recent earnings report last week, TFS showed its highest quarterly profit since going public in 2007. Another quarter or two of that, and it could be hard for regulators to keep this highly overcapitalized bank in limbo. And that could mean a return to the huge buybacks the company began in 2008 -- and the potential for a dividend as well. Both would really drive the share price higher.

And buybacks could be a huge event, since the company has excess capital greater than its entire market cap. That leaves a lot of room to juice the stock.

Foolish bottom line
So that's why I'm making TFS Financial the largest position in my Special Situations portfolio. On the next market day, I'll be adding $5,000 to the stock.

Interested in TFS Financial or have another stock to share? Join me on my discussion board and follow me on Twitter (@TMFRoyal).


Read/Post Comments (6) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 06, 2013, at 3:41 PM, turb0kat wrote:

    Nice Jim. I have about 15% in TFSL, plus the Jan calls for another 2%.

  • Report this Comment On August 08, 2013, at 1:46 PM, blades1013 wrote:

    Price/book looks 2/1 not what you indicated ("55% of tangible book value"). Am I missing something?

  • Report this Comment On August 12, 2013, at 12:47 AM, turb0kat wrote:

    332,318,750 shares issued

    of which 23,159,325 shares held as treasury shares

    of which 227,119,132 shares held by the holding company

    leaving 82,040,293 shares publicly traded

    Most financial sites miss the fact that the company itself owns 73% of the shares when calculating P/B and other financial ratios.

  • Report this Comment On August 27, 2013, at 9:57 AM, matthewy wrote:

    Great article thanks Jim. Could you estimate a time frame for a catalyst to unleash the value? I ask this as the Jan 2014 call options look interesting.

    How would the calls be affected by a large buyback?

    Thanks,

    Matt

  • Report this Comment On August 29, 2013, at 3:26 PM, TMFRoyal wrote:

    Hey, Matt,

    I didn't see your comment til now. Pop my message board and I'll always get right back to you.

    The time frame is unclear, part of what causes the discount. But they've put up 2 straight quarters of solid profitability.

    Anything that makes the stock move up should make calls go up by that and more.

    Again, stop by my message board (linked above) and we can chat about this.

    Jim

  • Report this Comment On September 16, 2013, at 10:52 AM, Mega wrote:

    I think your calculations are incorrect. The treasury shares should be subtracted, but the shares owned by the MHC should not be subtracted from float. (At least, until anything is known about a second step conversion.)

    There's no way of knowing when a second step conversion could be done, or on what terms. And management doesn't seem to be in a hurry to create shareholder value.

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