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For the past few weeks, I have been looking for higher quality, lower risk financial stocks. Some financials have been beaten down that have little or no exposure to sub-prime mortgages or structured finance securities, and tax loss selling is adding to the downward pressure.

This week I purchased a starter position in Capitol Bancorp Limited (CBC). A starter position is a small position (at most 100 or 200 shares) that puts the stock on your radar screen and makes it easier to get proxy information and other reports and to set up trading alerts. I learned this idea after listening to a conference call given by Thomas Allen, the portfolio manager who runs the Fidelity Advisor Mid Cap II fund [FIIMX]. Allen has over 500 stocks in his fund’s portfolio, but only about 200 stocks are real positions. The remaining positions are 100 shares and are added to keep them on his “radar” screen.

Capitol Bancorp Limited is a holding company that owns 57 community banks. They specialize in meeting the needs of entrepreneurs, professionals and other individuals looking for individually-tailored service. CBC currently own banks in the following states: (number of banks in each state is in parentheses)- Arizona (9), California (8), Colorado(3), Georgia (3), Illinois(1), Indiana (3), Michigan (13), Missouri (1), Nevada (5), New Mexico (1), New York (1), North Carolina (2), Ohio (2),Oregon (1), Washington (4).

Reasons I Like CBC

  1. The company headquarters are located in Michigan, and some investors may have avoided it because of the weak Michigan economy. But only 13 out of CBC’s 57 banks are located in Michigan, with new banks being added outside Michigan.
  2. CBC has gotten bad headline press from one of their Michigan banks (Macomb Community Bank) which does have some bad loan issues, but these problems are relatively minor for CBC, since it is only one bank out of 57.
  3. CBC sells for only 84% of book value. The takeover value of CBC would probably be at least 1.25X book value. Very few of their loans are secured by residential mortgages, and there is very little real estate owned. Their book value seems quite solid.
  4. Most of CBC’s lending is to small and medium size businesses and the default rate is close to zero. They do issue some residential mortgages, but only to existing customers.
  5. Tax loss selling has driven CBC down, but it should rebound nicely in January.