The big market mover this week was BofI Holding (NYSE:AX), with the stock rocketing almost 15% after it announced earnings on Tuesday -- and despite the massive price gain, there remain three reasons you should still consider buying this bank.
BofI Holding is the parent company of Bank of Internet USA, which offers banking services to individuals and businesses principally through the Internet. It has no branches. It's small, with a market capitalization of almost $1 billion. However, the stock has been on an incredible run through 2013 -- and as shown against the S&P 500, the KBW Bank Index, and the Technology SPDR ETF, it's beating everyone by an incredible margin:
The massive gain in its stock price this week has been par for the course for all of 2013. Normally that kind of gain would raise the eyebrows of any diligent value investor, but as Warren Buffett once said, "It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price
With that thought in mind, let's look at the three reasons I think BofI Holding is indeed a wonderful company -- and why, despite the run, it may even be a fair price.
1. Crushing the competition
Thanks to its unique business model of operating through the Internet, BofI Holding is able to deliver astounding performance results relative to its competition:
Although its peer group doesn't include household names, it does contain strong companies such as First Financial Northwest and First PacTrust Bancorp. Yet those results would not only beat BofI's smaller, regional peers; it also tops US Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC), which are the two banks often held up as the gold standard for profitability and efficiency:
Any time a company can deliver consistent, class-leading results, you should consider putting it on your watch list.
2. Growth, growth, growth
As with any young company, the name of the game is often growth, and while the stock has seen an incredible gain in its price, BofI Holding has also watched its loans and deposits take off over the past few years:
Its loan book has almost tripled, while its deposits have gone up by almost 200% -- indicating that it is seeing strong growth where it can earn returns for shareholders -- its assets.
This has also led to impressive growth in its net income:
Consider also that in its most recent quarter (the first of the 2014 fiscal year), it earned $12.2 million in net income, which is more than double what it earned just three years ago.
With any high-growth Internet-centric business, there is always fear that growth can fuel some sort of mystical probability of future results without actually delivering anything to shareholders. But at BofI Holding, the growth is leading to tangible dollars contributed to the company's bottom line.
3. It isn't that expensive
When Facebook commenced its IPO, many lambasted the pricing of the company because it was valued somewhere in the neighborhood of 25 times its sales and roughly 75 times its earnings. One of the principal ways a banking stock is valued is through the price-to-tangible-book ratio, which measures the price relative to what the company reports its equity value is worth.
As you would expect, BofI holding is "expensive," with a high price-to-tangible-book value, but not outrageously so. Consider that its multiple is only 15% higher than US Bancorp, and while it certainly is more than Wells Fargo, it also has none of the corresponding legal headaches.
It's rare that you'll find a company with such an astounding growth runway potentially in front of it at such a reasonable valuation -- and although no things in life are certain, BofI Holding certainly has a lot of attractive things going for it that make it worthy of your watch list.