Axos Financial Inc (AX -1.11%) already has delivered incredible returns for long-term investors. Since the company went public in 2005, its share price is up 926%, a fivefold better return than the S&P 500 over the same period. More recently, however, it hasn't exactly delivered big gains. Since peaking in June at an all-time high of $44.65 per share, Axos' stock price has fallen by one-third and now sits below where it started at the beginning of the year.
But with a new name (Axos was formerly known as BofI Holding) and the same incredible management team in place, it's as well-positioned to deliver big growth in 2019 and beyond as any other bank. And with rising interest rates and a generally healthy economy, along with the long-term trend of millennials starting to buy homes, I'd rate it as one of the top growth stocks to own over the next decade.
Keep reading to learn why it's my top growth stock to buy in 2019.
Not just a great internet bank -- this is a great bank
For years, Axos Financial was known as BofI, the holding company behind Bank of Internet. Frankly, that name was a bit of a pigeonhole, potentially limiting interest in the bank only to those who were comfortable with an "internet bank." In recent years, the bank has steadily increased the breadth and scope of the banking and financial services it provides and the name no longer was a good match for the business.
CEO Gregory Garrabrants has led the bank's steady evolution away from being primarily a jumbo loan lender to a more full-service bank. Axos' commercial and industrial (C&I) lending portfolio was $153 million at the end of fiscal 2014. In only four years, it has grown that business nearly tenfold, to $1.48 billion. It also has grown its auto lending business from $15 million to $214 million over the same time frame. Yes, residential mortgages still dominate its loan book, but the high rates of growth across its other lending lines have pushed it below 50% of the total last year versus almost 55% in 2014.
While this steady development of other banking lines is healthy and positive for Axos, what makes it a great bank is how profitable it has been. Since Garrabrants was named CEO in late 2007 in the midst of the worst financial and banking crisis in decades, Axos has consistently delivered some of the best returns of any bank.
A 10% return on assets and a 1% return on equity are two important benchmarks for banks. As the table above shows, not only has Axos consistently delivered far higher returns than the benchmark for "good" but has delivered better returns than some of the best-run banks in the U.S., such as Wells Fargo & Co, JP Morgan Chase & Co., and Bank of Hawaii Corporation.
Axos is a great growth stock worth your consideration
Under Garrabrants, Axos has steadily delivered above-average returns during one of the most persistently low interest-rate environments in decades, while also growing its assets substantially. But with less than $10 billion in assets, it remains a small bank with great growth prospects, and I expect it should be able to continue growing in the years to come.
Furthermore, rising interest rates should drive profits higher, particularly with its recently closed Nationwide Bank acquisition set to drive deposit costs (the interest it pays deposit holders) down. These costs have steadily crept higher in recent quarters, but that metric is now set to improve.
Lastly, Axos is just plain cheap. On an earnings basis, it's cheaper than much bigger banks like Wells Fargo (which isn't even allowed to grow right now), JP Morgan, and highly profitable yet small Bank of Hawaii.
On an assets basis it's also very cheap.
Axos may not look particularly cheap compared to other high-quality banks at nearly two times tangible book value, but with its "asset-light model," it probably should trade for a book value premium -- and that's before we even factor in that it's a fraction of the size of the megabanks, making its path to double-digit growth much easier. That makes smaller, uber-profitable Bank of Hawaii a better proxy for fair value, and at anything below 2.5 times book value, it looks cheap.
A high-quality, highly profitable bank with big growth prospects
Banking always will be a cyclical business, but it also can be very profitable with the right management team holding the reins. Garrabrants has proven his chops over the past decade as one of the best capital allocators in banking, transitioning BofI from a tiny internet bank selling jumbo mortgages in California into Axos, a growing financial-services firm where single-family home loans account for only half of its loans today. And now, his management team is taking steps to better position Axos for years of growth in a rising-interest-rate environment.
With a market cap of about $2 billion at recent prices, Axos still is a tiny blip on the global-banking radar. Investors who buy now or in 2019 should be in for a fantastic decade of growth to come.