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A Very Cheap Play on Possible Bank Consolidation

Andrew Bond
January 11, 2011

Many of the regional bank stocks had quite a good run in December as investors became more optimistic that 2011 would be a big year for acquisitions and consolidation in the industry. This optimism was fueled in part by Bank of Montreal's (NYSE: BMO  ) acquisition of troubled regional bank Marshall & Ilsley (NYSE: MI  ) that led to a 17.4% increase in the SPDR KBW Regional Banking (NYSE: KRE  ) exchange-traded fund in the month of December.

While I don't believe there is going to be a great deal of premium bank acquisitions in 2011, I do think consolidation will continue in the industry as more banks fail throughout the year. In 2010, 157 banks failed, and though the pace is expected to slow in the coming year, Federal Deposit Insurance Corp. Chairwoman Sheila Bair believes failures will remain at an elevated level. No one likes bank failures, but there is one stock that trades at a very cheap valuation that I believe could help investors profit from these failures if billionaire investor Gerald J. Ford decides to deploy some of his holding company's cash war chest in that direction.

Have cash, will deploy
The holding company, known as Hilltop Holdings (NYSE: HTH  ) , was formerly a mobile home operator called Affordable Residential Communities with a small property and casualty insurance subsidiary based in Texas called NLASCO. In 2007, the mobile home business was sold for $1.8 billion and the company was reorganized as Hilltop Holdings, which includes the insurance business and an extremely large pile of cash for Mr. Ford to reinvest.

The large pile of cash and the talents of Ford managing this cash are what excited me about this stock. The company's most recent quarterly report describes the structure as "a holding company that is endeavoring to make opportunistic acquisitions or effect a business combination. In connection with that strategy, we are identifying and evaluating potential targets on an ongoing basis."

Ford has made a career and billions of dollars investing in and turning around troubled banks. For two decades beginning in 1975, Ford bought distressed banks, mainly taking advantage of the discounts presented as a result of the savings and loan crisis. Ford bought a total of 30 banks and five thrifts, and would sell them for a total of $605