I’ve gotten a lot of questions about this latest pitch from Chris Mayer… and, honestly, I probably can’t provide an exact answer for you — not enough clues have leaked out just yet. But I’ll dig into it and make some guesses.
The pitch is that Mayer is about to make an “urgent announcement” – here’s a bit from the ad that folks have been forwarding to me about a conference call that Mayer is hosting:
“The #1 investment Chris Mayer recommends you make right now – this is an urgent situation you have to take advantage of – and he is only sharing it for the first time on this call.
“On Thursday, Chris Mayer will tell you all about this investment… which is one of his all-time favorites. He has invested in it personally, recommended it a dozen times since 2010, and never lost money on one of these deals…”
Never lost money? That sounds good!
“This investment has proven over a back-test of 645 investments to pay out an average of $6,200 for every $10,000 invested, with 86.9% certainty.
“Some of the world’s greatest investors call it a ‘can’t-lose proposition’ and say ‘it’s almost like getting money for free.'”
And, of course, there’s some urgency to this deal:
“… the main investment idea he has to share with you on Thursday is a limited-time opportunity. It’s very compelling, and if you are interested, you will only have a short window of time to take advantage of it….”
So… what is it? Well, knowing what Chris Mayer has been excited about over the years, I suspect he’s again talking up mutual conversions, also sometimes called thrift conversions. That’s when a mutually owned bank (meaning it’s owned by its depositors) converts to being a stockholder company (owned by shareholders). This conversion process takes a year or two, usually, and involves the company restructuring, offering shares to account holders and insiders at a conversion price, and then going public to offer up any remaining shares not claimed by the mutual owners.
Generally this happens in two stages, with a portion of the bank converting to stock ownership at first, setting a price for a while, and then the remainder of the conversion happening as the mutual owners give up full ownership and control with a second conversion offering.
I don’t know whether the 86.9% certainty number is a general one, but it is widely accepted that these tend to be good investments — though they’re not always exciting or sexy. It is almost always a great deal for the folks who have savings accounts in those banks that convert, because they get the opportunity to buy shares at what is usually a significant discount to book value.
There’s a good general article about this process from Reuters here if you’re curious — it’s a few years old, so the examples aren’t current, but the process hasn’t changed.
And though we’re running low on mutual conversions, since so many have converted already, this is not a new idea — Peter Lynch, famed former manager of the Magellan fund at Fidelity and author of One Up on Wall Street, one of the better and more popular books for investors available (definitely worth a read if you want a basic primer on the market), wrote quite a bit about mutual conversions, and he’s not the only well-known investor who likes the strategy. They also crop up in the popular press from time to time — like this Boston Globe piece. Despite the attention, these investments still apparently do very well on average… perhaps because they’re mostly fairly small and boring.
Oh, and Chris Mayer himself wrote a piece for the Washington Post a couple years ago on one strategy that folks have used, opening up accounts in a variety of mutual thrifts (savings banks) and waiting for them to convert so you, as an accountholder, can buy in cheap (generally the first crack at buying shares in a conversion goes to those who’ve been accountholders before the conversion process is contemplated or announced).
The big advantage in that initial conversion is that new money is going in (those who have a right to buy shares pay for them — for example, at $10 a share), but the valuation at which they buy in is based on the company before the cash infusion… so that cash goes in and inflates the book value right away, and the banks are typically offered for conversion at a discount to tangible book value anyway. That sets up for good odds that the shares will appreciate, since they’re undervalued and the bank is likely, after the conversion, at least a little bit overcapitalized and therefore likely to either grow (perhaps by acquiring other little banks) or be acquired. Throw in the fact that a gradually rising rate cycle is likely to be good for net interest margins, which is where most standard savings banks earn a lot of their money, and it’s both a good strategy and potentially a good time for the sector as a whole.
There are two strategies that tend to be popularly considered by investors — the first is just to buy these conversions either after the first step or the second step of the conversion, often right near the IPO if the IPO doesn’t get a lot of attention and go too crazy in price. And the second is to look at the banks who converted a few years ago and see whether some of them are attractive, because the other key to these mutual conversions it that they make it easier for a bank to participate in the ongoing consolidation of the banking industry.
What does that mean in practice? It means that three years after they convert to stockholder companies, banks become eligible to be acquired. And they often are.
So what are the urgent opportunities Mayer is talking about? Well, assuming I’m right and he’s talking up mutual conversions again, the two companies that have filed for IPOs but haven’t yet gone public as newly converted banks are Eagle Financial Bancorp (S-1 here) in Cincinnati, and PCSB Financial (S-1) in Westchester County, NY.
My best guess is that he’s probably interested in investing in PCSB Financial if the IPO doesn’t pop too crazily (or if you’re lucky enough to get in on the IPO), because that’s likely to be one of the most ardently followed mutual conversions in a long time — mostly because it’s headquartered in a wealthy NY suburb, where banks are very valuable (there have been some serious windfall earnings made by folks investing in the last big wave of NY mutual conversions)… and, perhaps not coincidentally, lots of Wall Street folks live there so this is not one of the conversions that will go unnoticed for long.
I don’t think an IPO date is set for that one, but the conversion dates are past (the final deadline was March 17 for account holders to register for shares, I believe), so it could come at almost any time. If I can get an allocation to those shares, I will, but that’s extremely unlikely.
What else could it be? The wave of three-year-old conversions is getting pretty big now, and there are maybe a half-dozen or so stocks that will become eligible for acquisition this year — with, presumably, a nice premium price paid for any that will be acquired. So what are they, and do any stand out as opportunities?
Here are the ones I’m aware of that are either three years out from their IPO, or getting close to that date, I pulled the data out of a CapitalIQ Report:
Coastway Bancorp (CWAY) — Warwick, RI (Jan 2014 IPO)
Edgewater Bancorp (EGDW) — St. Joseph, MI (Jan 2014 IPO)
Waterstone Financial (WSBF) — Wauwatosa, WI (Jan 2014 IPO)
Clifton Bancorp (CSBK) — Clifton, NJ (4/2/14 IPO)
Sugar Creek Financial (SUGR) — Trenton, IL (4/9/14 IPO)
Home Bancorp Wisconsin (HWIS) — Madison, WI (4/24/14 IPO)
Other than Edgewater, for which data doesn’t come up in YCharts for me for some reason, those are all growing revenues and look like they’re priced at relatively reasonable price/tangible book valuations that could provide for room for a takeover premium if they’re otherwise appealing. I would be most curious about Clifton Bancorp, personally, because it’s trading at what is probably (not knowing anything else about it) a reasonable premium for a high-density area (1.18X tangible book value, its locations are spread around several of the close-in New York City suburbs, from Hoboken to Paterson) and it’s larger than some of the others, so that gives slightly better odds that it could be a meaningful acquisition for a big bank that wouldn’t mind overpaying a bit. And since they’re only 10 days away from exiting that acquisition moratorium period, well, perhaps that could be the urgency that Chris Mayer’s ad is expressing.
That’s a wild guess… and there’s no guarantee of a nice, fat acquisition with any of those, of course — going back to 2000, well over half of the mutual conversions were eventually acquired, but a couple of them also failed in the financial crisis and only about half of the mutual conversions since the crisis have been acquired. But, frankly, that’s pretty good odds — I can’t think of any other identifiable groups of stocks where you can take a basket and be pretty sure that about half of them are going to be taken over in the next 5-10 years.
Historically, these banks are generally acquired at a premium to tangible book — but it could be a small premium or a large premium, it depends on how attractive the bank’s franchise or local community might be (you want to own growing banks in healthy small towns, regions or suburbs, where there’s either a decent chance of fundamental growth in deposits or loans or where other banks might want to expand).
And, of course, if the market falls and banking valuations fall, these stocks will fall along with them — I’d guess that they will keep up with the historical averages and do better than the market, with relatively lower risk, but that doesn’t mean they’ll necessarily go up if the market goes down, and it’s quite possible that some of them have individual problems or issues that should concern investors — I haven’t looked at the individual businesses to any real degree.
If you do decide to pursue this kind of investment strategy, either buying up mutual conversions as soon as they go public or buying them up later in hopes they’ll be acquired (or, better yet, getting in on the conversion or the IPO), it’s important to remind yourself that you’re looking for returns of 30-60% over a few years on a takeover, with some luck, you’re not looking to shoot out the lights… and you might just end up with a small bank with reasonable financials and slow revenue growth that generates a lower profit than that (or, of course, a lousy bank that screws something up, or has the major employer in its town shut down operations, or goes bankrupt because the CEO does something crazy and runs away to some non-extradition country… as can happen with any company).
So I’ll leave you there — No, I’m not sure that this is what Chris Mayer will be talking about tomorrow in his “conference call” ads for potential Bonner and Partners subscribers, but that’s my best guess. And there’s no real secret to mutual conversions — they’re just a little bit boring and require a little more work if you want to seek them out and invest in a basket of them. If you’ve got some favorites, or other ideas for what Mayer might be touting, feel free to chime in with a comment below. Thanks for reading!