With the parabolic rise of the S&P 500 since last November, multiples for many equities have reached heights that make investing queasy for value oriented investors, so the goal for them is to find valuation mismatches among thinly traded stocks that sold off in the 2008 financial crisis, but despite positive fundamentals, have not come back to their original levels or haven't risen to the degree that the change in their business would reasonably deserve.
One example of this valuation mismatch would be Maine-based bank Katahdin Bankshares Corp (OTCQB:KTHN), which saw its shares tumble from $15 to $8 from late 2008 to early 2009, snapping back to the $16 range in 2010, only to fade lower to a current price of $11.55, or 83% of book value and trading at less than 10 times the company's $1.20 of earnings in the last four reported quarters. Book value in calendar year 2008 was $10.50, indicating the stock was trading well above book value, not the 17% discount to book the stock currently finds itself languished in.
During the past year, Katahdin's total assets have impressively climbed from $569 million to $611 million, while non-performing assets to total assets have dropped from 1.74% to 1.40%. Non performing assets to total assets by year end 2009 totaled 2.69%, suggesting the bank has done well to survive the financial crisis, without having to issue additional shares with secondary offers. Total assets at year end 2008 were at $465 million, providing additional evidence that despite a 30% growth in assets from then to now, the stock is trading well below 2008 highs.
The hope for investors would be in addition to downside protection in a richly valued market, small cap value funds, newsletter writers or individual investors running value-based stock screens will eventually turn their eye to Katahdin. The bank has a reasonable Q1 2013 Texas Ratio of 11.29% and a Top 200 Bank rating by American Banker. Sporting a 3.4% dividend yield, patient investors can enjoy a nice return without fearing nearly the downside of the S&P 500, trading at a projected 15 times 2013 earnings and a yield below 2%. As for a more direct correlation, Katahdin trades at an even larger discount to earnings and book value to the First Trust NASDAQ ABA Community Bank (QABA) ETF, which has an average price earnings of 16.27 and a price to book of 1.32, though median market capitalization is $672 million for this ETF, versus a $39.3 million market cap for Katahdin.
With any stock as thinly traded as Katahdin, investors should place limit orders and be patient in accumulating or selling shares. Katahdin could easily justify a valuation of 1.1 times book, with additional valuation growth depending on future asset growth, book value and earnings growth, continued reduction in non-performing assets, as well as economic and population growth in Maine. On the latter topic, Maine has a lower than U.S. average unemployment rate of 6.8%, while its population has grown from 1.28 million in 2000 to 1.33 million in 2012, though on the downside, Maine's 2012 GDP was a positive 0.5%, ranking it just 44th among the states.