WSFS Financial: A 'GARP' Financial Stock In The Peter Lynch Mold

Feb.25.14 | About: WSFS Financial (WSFS)

Five years after it started to come under control, the specter of the 2008-09 financial crisis still hangs over U.S. financial stocks. While many financial firms have been posting strong earnings growth and getting their balance sheets in order, investors have been lukewarm on them, with financial stocks lagging well behind the broader market over the past one and three year periods, according to Morningstar.

And can you blame them? The trauma of 2008-09 was so intense that it's not surprising investors view the sector with skepticism, even half a decade after the worst of the crisis. But for value-focused strong-stomached investors, that creates buying opportunities, and right now my guru-inspired stock-picking models see a big opportunity in one small financial stock in particular. On Feb. 4, my models triggered a Trade Alert on WSFS Financial Corporation (NASDAQ:WSFS) a $625 million market cap Delaware-based company. These alerts are issued when a stock's fundamentals earn it certain level of interest from one or more of my models. With WSFS, it was my Peter Lynch-based model that triggered the alert, which runs through May 6. My back-testing has shown that historically, stocks possessing similar fundamental characteristics have on average returned more than 12.2% over a three-month period, compared to 3.6% for the S&P 500.

Resiliency Over Time

At over 180 years old, WSFS is the seventh-oldest bank continuously operating under the same name in the United States. The firm has about $4.5 billion in assets on its balance sheet and $8.8 billion in fiduciary assets, which includes about $1.1 billion in assets under management. It operates more than 50 offices, mostly in Delaware and Pennsylvania though it has one office each in Virginia and Nevada as well. Its core business is commercial lending funded through customer-generated deposits, though last year it purchased Pennsylvania-based mortgage banker Array Financial Group, which specializes in residential mortgages.

Like many financials, the firm had some hard times during the 2008-09 financial crisis, with earnings turning slightly negative and its dividend eliminated in 2009. The firm did receive money through the federal government's Toxic Asset Relief Program, but we are not talking about a huge Citibank/Bank of America-type bailout. WSFS got about $53 million in January 2009 as part of the Treasury's Capital Purchase Program (in exchange for preferred shares that paid the government a 5% dividend). It finished repurchasing those shares, repaying the government, in August of last year. It's also worth noting that, while many banks were criticized for hoarding cash in recent years, WSFS has been increasing its loan portfolio at a pretty nice pace. At the end of the second quarter of 2008, right before the financial crisis would rock world markets, the firm had about $2.3 billion of net loans in its portfolio. At the end of 2013 it had more than $2.9 billion. In 2013 alone, the portfolio grew by 13%.

Today, the bank appears to be in pretty good shape financially, with a Tier 1 leverage ratio of 10.4% and a total risk-based capital ratio of 14.4% at the end of 2013. It also has an equity/assets ratio of 8%, and a return on assets rate of 1.06%, two big reasons why it gets such high marks from my Lynch-based model. Lynch, one of the most successful mutual fund managers of all-time, liked conservatively financed companies, usually using the debt/equity ratio to gauge a company's financial health. The debt/equity ratio doesn't really work with financials, so instead he used the equity/assets ratio and return on assets rate as his barometers of their financial health and profitability. The model I base on his writings uses targets of 5% for the former and 1% for the latter, so WSFS makes the grade.

Lynch is well known for his "GARP" investment approach, which involved looking for "Growth At a Reasonable Price." To find companies that fit that description, he pioneered the use of the PE-to-Growth ratio, which divides a company's price/earnings ratio by its historical growth rate. The idea behind the ratio is that the faster a company is growing, the higher valuation you should be willing to pay for its shares. PEG ratios below 1.0 are acceptable to this model, with those below 0.5 the best case.

Using an average of the three- and five-year earnings-per-share growth rates, WSFS has been growing EPS at a 32.7% clip over the long term - just the kind of stellar growth that the Lynch approach likes to see. It trades for a very reasonable 14 times trailing 12 month earnings, however, likely due at least in part to continuing fears hovering over the financial sector. That makes for a 0.43 PEG ratio, indicating that its shares are a big-time bargain right now.

Other Interest

The Lynch-inspired model isn't the only one that likes WSFS. My Martin Zweig-based model, for example, has some interest in the stock. It not only likes the firm's stellar long-term growth, but also the fact that growth has been even stronger of late, with EPS increasing by 54.6%, 52.6%, 137.7% and 70.5% over the past four quarters (from oldest to most recent). It also likes the firm's reasonable P/E ratio, and the fact that it has increased EPS in each year of the past half decade.

Of course, some will argue that banks like WSFS have too many headwinds going against them. And, to be sure, this environment is filled with challenges. In this era of "financial repression," interest rates are ultra low, which means lending spreads are quite small, which hurts profits for these types of companies. But to me, times when people are talking about how things like financial repression are negatively impacting banks are the times you want to be buying strong, fundamentally sound bank shares - not when earnings are peaking, optimism is everywhere, and valuations are bloated. That's why I think that, even though this Trade Alert lasts for three months, WSFS may well be a good longer-term play as well, provided that its fundamentals and financials remain intact.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.