One stock that's been on my radar for a few years now is BofI Holdings (NASDAQ:BOFI), better known as The Bank of the Internet. The company is a leader in a completely branchless bank model, which helps save millions in overhead costs.
I've sat on the sidelines with frustration as BofI stock has climbed 700% between 2012 and earlier this August. As someone who's not an expert in banking, I simply spent my available time researching other companies, and missed the opportunity to take part in such a big winner.
During the last few weeks, however, I've finally devoted time to BofI stock. It's down 19% from its highs, and continues to impress me with both its income and deposit growth. But after looking at the company through a new lens, I'm taking a pass on BofI stock. Read below to find out why.
Dealing with opacity
There is, perhaps, no industry with more opaque finances than banking. Even if you're an expert at dissecting a bank's financial statements, there's usually some key information that no one is aware of except for the bank's principal officers. While SEC filings are helpful, they aren't completely exhaustive.
Recently, I've been applying a new lens to evaluate stock holdings. Derived from best-selling author, investor, and risk expert Nassim Taleb's book, Antifragile, this lens aims to gain a certain level of comfort when confronted with such opacity.
Taleb argues that no one is more aware of the risks inherent with a company better than the people who build it. In order to make sure that your interests are aligned with management's, you want to make sure they have skin in the game -- or are exposed, as you are, to downside risks.
This is especially important in light of a number of short attacks the company has come under recently. Staring with blog entries on Seeking Alpha, and including a piece in The New York Times, detractors have warned about the quality of the bank's mortgage loans. They focus heavily on the fact that many of the mortgages that BofI holds on its books are not qualified mortgages.
The bearish argument is pretty simple: while the inflated interest rates on these loans -- around 5%, according to CEO Greg Garrabrants -- has provided the bulk of income for BofI recently, those profits could turn south quickly if the housing market turns.
Perhaps the most damning accusation is that management is making the bank's loan-to-value, or LTV, figures look more favorable than they really are. BofI bulls counter by saying that the recent approval of the company's acquisition of H&R Block's (NYSE:HRB) banking division is proof that regulators have kicked the tires on BofI and given it their stamp of approval.
Many of those writing these articles have openly stated that they have short positions against BofI stock -- and need to be taken with a measure of skepticism.
How antifragile is BofI stock?
I'm not going to focus on the veracity of these accusations here -- we have far smarter banking experts at the Fool to do that. Instead, I'm going to offer what I consider to be important risks that individual investors need to consider before investing in the company.
First, let's get back to Taleb's idea of "skin in the game." Looking at the company's SEC filings, I can see that CEO Greg Garrabrants owns roughly 197,000 shares of BofI -- this equates to roughly 1.36% of the company. Those holdings are worth about $22 million today, and the percentage ownership is roughly in line with what other bank CEOs own. In general, the company's board has done a good job of aligning Garrabrants with shareholders' interests.
And yet, this still gives me pause. Looking at my own personal holdings, Amazon, Baidu, Alphabet, IPG Photonics, and Facebook, combined account for a whopping 48% of my real-life portfolio. In all five of these companies, I can take heart in the fact that a founder/CEO runs the company and owns well more than 10% of all shares outstanding. They have serious "skin in the game."
That's not the case with BofI, but that alone isn't what has me shying away from BofI stock.
I'm also not a huge fan of how Garrabrants has publicly addressed the concerns of short-sellers. While it's understandable to be upset that someone is accusing you of fraud, I believe that, if a business model is sound, the results will eventually speak for themselves.
In the New York Times piece, Garrabrants said that short-sellers were running into an "earnings juggernaut." And in response to an analyst question about potential changes regulators have asked the bank to make since starting the approval process for acquiring H&R Block's bank, Garrabrants said, "[My dad] used to say... when you get a question, like, 'Have you stopped beating your wife?' you always have to step back and say, 'Wait a minute. What was that -- just question?'"
I don't think that taking this approach to real questions about business practices in an opaque industry is very helpful. Quite frankly, it alarms me. But what really tipped the scales away from buying BofI stock were concerns about the culture at the bank.
Using Glassdoor reviews as a proxy, there seems to be a disconnect between Garrabrants -- who proclaims that he's proud of the bank's culture -- and his employees. BofI has an average score of 2.7 (out of five), only 41% would recommend the company to a friend, and Garrabrants has an approval rating of just 51%. It also appears as though there's no functional HR department at the company, if the Glassdoor reviews are to be believed.
Further, by looking at the interview experience of potential vice presidents at the company, an unflattering picture emerges. Said one potential hire: "I got the feeling that I'd have to deal with a lot of negativity in the job... by far the worst interview process I've been involved in."
Putting it all together
It's entirely possible that BofI is everything that the CEO would have us believe: a quality bank that's using data in a smart way to both cut overhead costs and focus on a unique and profitable clientele. But for me, the risks of investing in this bank -- which is trading for 3.5 times book value -- far outweigh potential gains at this point.
Individual investors may disagree about such culture and compensation concerns. That's a decision that each individual investor needs to make individually. At the end of the day, I believe my money is better served in other places.
Brian Stoffel owns shares of Amazon.com, Baidu, Facebook, Google (A shares), Google (C shares), and IPG Photonics. The Motley Fool owns and recommends Amazon.com, Baidu, BofI Holding, Facebook, Google (A shares), Google (C shares), and IPG Photonics. 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.