No Correction, No Problem: 3 Stocks That Look Cheap Now

Includes: CHSP, NYCB, VLY
by: Wealthcompound

So I wrote a quick post of three stocks to research now for a possible market correction (you can read that post here). It would seem that we are due for a correction soon. However, I am not going to make any prediction as to when or if the market turns down. For all I know, the bull market could continue for some time. If you're sitting on a lot of cash in your portfolio, earning a pittance in interest while the general market appreciates is no fun and can lead to irrational mistakes. So while it could be argued that stocks in general are good value now compared to other assets (I would agree with this as well), it is difficult to find companies that are cheap, especially compared to 4, 3 or even 2 years ago. These 3 stocks are on my radar as potentially being good values in this possibly frothy market as all three pay nice dividends and two have been left behind in the rally. Start researching them now because if the market continues on its upward trajectory, these values could be gone.

New York Community Bancorp (NYSE:NYCB) - It seems that the banking industry, from the big money center institutions to the community banks, is getting stronger and stronger as each quarter passes. Considering the number of high quality companies across the sector, opportunities for investors continue to be plentiful. One such company is NYCB. NYCB primarily operates in the New York/New Jersey metro area but in 2009 the company purchased the deposits and certain assets of AmTrust Bank expanding into Ohio, Florida and Arizona. What attracts most investors to NYCB is its dividend, currently yielding approximately 7.3%. While some analysts believed the dividend of a $1.00/share was certain to be cut during the depths of the recession, NYCB has maintained the $0.25 quarterly payout since 2004 and has continually expressed a commitment to this payout. Although it represents close to a 90% payout ratio, I believed that the dividend was safe several years ago and I believe it is safer now. NYCB is a leading producer of loans focused on below rent, multi-family dwellings. In fact, 68% of its non-covered loan portfolio is made up of these loans (I am only focused on non-covered loans. Covered loans are backed by the FDIC upon acquisition of failed bank assets). Generally, NYCB will lend up to 75% of the value on such property but the average LTV on the total loan portfolio over the past several years is in the mid-to high 50% range. Large amounts of equity in property acquisitions mean borrowers are more likely to avoid defaults. With a non-performing, non-covered loan to total non-covered loan ratio of .96%, NYCB is in very good shape.

What really makes the bank appealing, especially now that Hudson City Bancorp (NASDAQ:HCBK) is being acquired (another bank in my backyard that I invested in and wrote about. My last article on HCBK can be found here) is that it appears NYCB may have an earnings catalyst going forward. NYC is home to some of the most valuable real estate in the world, primarily in Manhattan. As a result, there are numerous apartments and buildings all over the city that are rent controlled with many of these apartments existing in exactly the types of buildings that NYCB specializes. Word in local real estate circles is that well to do (read: not billionaires) foreign buyers have started to show interest in these types of dwellings in Queens, Brooklyn and the Bronx. Wanting to capitalize on the low interest rates and move money into hard assets in prime American real estate, these potential buyers could certainly be customers of NYCB providing a nice earnings boost and the potential for dividend increase down the road. Also, one last consideration: ironically, the dividend yield of 7.3% is equivalent to the prevailing cap rates in the outer boroughs for the types of properties that NYCB usually finances. Instead of purchasing the property and the associated headaches that accompany being a landlord, someone with the means to borrow at these interest rates (such as a cash out refinance on 100% owned property at 4.2%) and with a nice amount of cash acting as a "down payment" could theoretically profit from the spread, using the dividends to pay down the mortgage, similar to an income producing property. Mind you, this takes a huge amount of guts and sufficient means such as a paid off house, neither of which I have.

Valley National Bancorp (NYSE:VLY) - Another tri-state area regional bank and a competitor of NYCB (although it seems more for deposits than loans), VLY is an interesting prospect for investment because it appears upon my preliminary analysis that the company has potential for significant upside but with certain risks. Management is currently paying the owners an annualized dividend of $0.65/share which at the current price of $9.20 as of May 23rd results in a yield of 7%. This is the good news. Unfortunately, the dividend was reduced one cent in 2012 and management has consistently issued 5% stock dividends consecutively since 2003. I personally disdain stock dividends. Give me the cash so I can choose what to do with it or don't issue the dividend. However, this certainly isn't the most egregious sin ever committed by a company's management. Also, troubling is the fact that VLY has seen its total non-performing assets to total assets ratio increase from .45% in 2008 to 1.74% in 2012 steadily increasing over that time when many banks began to either see declines or stabilization in this ratio. However, the NPAs appear to be stabilizing and in 2012, close to half of the increase in NPAs were a result of non-accrual debt securities as opposed to non-accrual loans. While not an overly positive development, it could mean better things ahead for the loan portfolio. Further analysis of the portfolio and other assets are a necessity before considering an investment in VLY. However, the dividend and potential upside make VLY a worthy candidate for further research.

Chesapeake Lodging Trust (NYSE:CHSP) - Thought it would be another bank, didn't you? While I have never been a huge fan of REITs (except when a liquidation or bankruptcy like General Growth Properties (NYSE:GGP) happens, providing great opportunities), the low interest rate environment means that REITs, MLPs, Royalty Trusts, etc. have been on many an investors radar and I am no exception. I came across CHSP only a few weeks ago but it appears to be an interesting potential opportunity and should be further researched, which I plan to do ASAP. CHSP was started in 2009 and had its IPO in January of 2010. Its focus is to acquire upscale, boutique hotels in major markets and has so far acquired 16 properties (15 plus 1 under contract as of 2012 10K) in locations such as New York, Boston, Chicago, Seattle and Los Angeles to name a few. CHSP believes ample opportunities exist to acquire such properties at below replacement cost with attractive returns and upside potential due to prevailing market dynamics. A quick glance at the acquisition dates in the annual report show 5 properties acquired in 2010, 7 acquired in 2011 and 3 acquired in 2012. Judging by the dates alone it seems likely that CHSP acquired most of these properties at well below replacement cost although more analysis of acquisition prices and comps would be needed to determine this with more certainty. Also, I do like that it appears acquisitions have slowed as hotel prices have increased. Opportunities were certainly less in 2012 than they were in the prior two years. Funds from operations (FFO) for 2012 were $1.51/share, more than enough to cover the $0.96/share dividend (generally it is better to use adjusted FFO but in this case the properties appear to be fairly new construction not requiring much recurring maintenance and other expenditures to be capitalized). In addition, occupancy at the hotels is primarily driven by business travelers, with a 78.4% occupancy rate in 2012. Although I did not look at the ADR (average daily rates) and RevPAR (revenue per available room) which are two key hotel metrics, a high occupancy rate usually bodes well for such metrics. While my research is just starting, CHSP could be a promising REIT to park some cash.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NYCB over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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