This year has been a difficult market for Wall Street, with high inflation and rising interest rates as the main culprits. The S&P 500 got off to its worst first-half start since 1970, and the benchmark index is currently down 17% year to date.
While temporary macroeconomic problems have weighed on the market, patient investors now have an opportunity to invest in stellar companies at deep discounts. One beaten-down company worth your consideration is Live Oak Bancshares (LOB -4.26%). Since peaking at nearly $100 per share last November, Live Oak's stock is down 65% and is priced at a cheap valuation that is hard to ignore.
Image source: Getty Images.
The bank for small businesses
Live Oak Bancshares is a regional bank specializing in serving small-business customers. It's the most significant small-business lender in the U.S. through the Small Business Administration's (SBA) 7(a) lending program. This year, Live Oak has made more than 1,000 loans through this program, totaling nearly $1.5 billion, outpacing Newtek Business Services and Huntington Bancshares, which have made $937 million and $890 million in loans, respectively.
Its focus on small businesses made it a big winner from the Paycheck Protection Program (PPP), which was introduced amid the pandemic to keep small businesses going. In 2020, the bank originated $2.3 billion of these loans, which powered substantial fee and loan growth that helped Live Oak put up its best year in 2021.
Market volatility has weighed this bank down
Live Oak has seen a slowdown in the sale of its SBA loans in the secondary market, selling only $50 million in loans compared with $211 million in the first quarter. The bank pointed out that challenging market conditions due to rising interest rates were the culprit. Fixed-rate loans were challenging for the bank to sell, since these loans won't be adjusted with rising interest rates, making them less appealing to investors.
With tailwinds from the PPP program waning and challenging market conditions persisting, Live Oak's stock has taken a hit and is down 65% from its peak price last year and 61% year to date. To put this in perspective, the SPDR S&P Regional Banking ETF has lost about 13% year to date.
Live Oak stock was trading at a rich valuation over the last two years, with its price-to-earnings (P/E) ratio trading near 40 at the start of 2021. However, after its sell-off, the stock trades at a P/E ratio of 7.8 -- its lowest level since 2019 and far below its 10-year average.
LOB PE Ratio data by YCharts.
Live Oak is a high-quality bank ready to bounce back
Live Oak is a top-notch bank that tends to be misunderstood by investors. The bank has built up a strong knowledge of small businesses and a diversified portfolio across companies that can withstand the test of time. It maintains a strong credit profile; since 2013, it has charged off 0.3% of SBA loans, far below the program's average charge-off rate of 4%. Also, 44% of its loans and leases are government-backed, guaranteed loans.
The bank has also built up a strong portfolio of venture investments. For example, it recently realized a $120 million gain on the sale of its investment in Finxact, a fintech solution that helps digitize banking, assisting banks to roll out new digital banking products quickly. This gain gave Live Oak a good injection of capital that it can use to continue building its lending and tech teams and also put into other venture investments.
Live Oak's expertise with small businesses makes it appealing, and being a branchless bank helps it keep expenses lower compared to peers, making it very efficient. While the bank still faces short-term headwinds from rising interest rates and uncertainty in the secondary sales markets, these pressures could subside if interest-rate increases slow down -- making Live Oak's stock a no-brainer buy at its current valuation.
