I’m Back to Buy More First Financial Northwest

This bank remains too cheap.

Sep 3, 2014 at 5:25PM

It's been just over a month since my Special Situations portfolio last acquired shares of First Financial Northwest (NASDAQ:FFNW), but I'm back to buy more as the stock has fallen in recent weeks. It now trades at about 90% of my expectation of third-quarter tangible book value, and has catalysts aplenty to take the stock higher.

The company has significant opportunities to unlock value here. In April, First Financial announced a 10% stock repurchase authorization. By the second-quarter report, the company had completed about 60% of that authorization, and I expect the remainder to be finished by the time the third-quarter report is issued. Add potential earnings, subtract dividends paid, and factor in the effects of the buyback, and the stock is valued today at just 90% of its tangible book value of $11.75, per my calculations.

Is that the end of the buybacks? It certainly doesn't look like it!

The company has been aggressively buying its stock over the last couple years at the insistence of activist investor Joe Stilwell. And it retains so much cash that it could run buybacks for the next several years, if required. As a rough approximation of how much excess cash the company carries, the average equity to average assets runs at a ridonkulously high 20.5%. With assets of roughly $900 million, that implies excess capital could comfortably be $90 million. So without disturbing its core business, the bank could repurchase over half its stock at today's price. Another 10% buyback could well be in the offing as soon as this one is completed.

Credit metrics are trending in the right way, and profitability is solid. And the bank operates in the Seattle area -- one of the strongest U.S. markets.

The exit plan here is a sale of the bank. Stilwell's track record in this subsector at getting deals done is phenomenal. As I said in my most recent buy recommendation: "Bank activist extraordinaire Joe Stilwell came in to help clean up the mess, and he ran a proxy contest for a seat on the board. His platform was to clean up the bank and then sell it as soon as possible for as much as possible. Stilwell's record in the small-financials space is unparalleled. I expect him to succeed." For more on the stock, follow me on Twitter: @TMFRoyal. And check out my dedicated discussion board.

Even CEO Joe Kiley has incentive to sell the bank. In December, he received a sweetened change-of-control agreement that pays him three times his annual salary (instead of the one times he was authorized to receive before).

Foolish takeaway
First Financial Northwest already comprises 7% of my Special Situations portfolio, but I'm adding another $1,000 to the position, taking it to over 8%, on the next market day. This remains a low-risk stock with a reasonable chance of significant near-term upside.

Speaking of upside potential...
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Jim Royal owns shares of First Financial Northwest. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and First Financial Northwest. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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