3 Signs of a Bottom for Sovereign Bancorp

Sovereign Bancorp (NYSE: SOV) has been beaten down badly. They, like every other bank, made poor decisions when selecting which loans they would fund. As an investor, it’s my job to look for signs that struggling banks have finally hit bottom. If such signs existed, certain banks would be the value of the decade. Well, folks, I think I found such a sign in Sovereign.

Here at Freund Investing, we track insider purchases quite heavily, because we believe they are indicative of a strong investment. Over the past few weeks, insiders at Sovereign have been buying boatloads of the company’s stock at current market prices. In fact, they’ve bought nearly $1 billion worth. Now, I know that some of this was part of the equity offering that Sovereign introduced to raise capital, but it doesn’t change the fact that insiders bought at $8 per share, and the current price is only $8.10. Insiders sell for many reasons, but they buy for only one reason: they believe the stock is undervalued.

Sovereign is not easy to value. But I can tell you with certainty that those who can value it best are working there every single day; the insiders. What I can also tell you is that one of the significant buyers was Banco Santender (NYSE: STD), who has been slowly building up its position in Sovereign.

So if we put it all into perspective, we find that:

1. There is blood in the streets for Sovereign.
2. Insiders are buying heavily.
3. Banco Santender still likes Sovereign a whole lot, and might buy them completely at some point in the near future.

I don’t pretend to be able to value Sovereign completely. But from all the insider activity, activity from those who do know how to value Sovereign, I believe we have found a bottom for Sovereign. While the timing may be slightly off, the 3.9% dividend will even pay you while you wait for the company to either start performing better or get bought out. Pretty solid odds from my perspective.

Disclosure: Author does not own any shares in any of the companies mentioned.

Comments

[Sebastian:]

Greeting my good Freund ;-),

Nice article in times when clubbing of US-regional banks is so en vogue.
I really can't understand the doom and gloom about small banks while investors start to talk about a bottom in the big money-centers.
The regionals are in many cases better capitalized and hold a less dangerous loan portfolio than their bigger brethren. Plus there are still small banks out there, which are actually in the banking-business (borrow at 3, lend at 6, play golf at 3) rather than playing around with derivatives 'n stuff.

I just wanted to tell you (in amazon.com-lingo) that hence you are interested in Sovereign Bancorp., you might also like Mercantile Bank of Michigan (MBWM). They operating in an economically depressed region but have a rather low exposure to residential loans. MBWM still is "well capitalized" according to the equity to risk weighted assets-ratios and has acceptable levels of unperforming loans as well as 30 day+ - delinquencies. The bank is trading below half book value and experienced considerable insider buys from many of the companys' officers and directors.

2008 May 22 05:29 AM

[boater:]

Good morning:
One of us has the wrong data. The dividend has been suspended and there has not been any word of reinstatement. That would seem to be too soon both since the suspension and the raising of new capital. Do you have more information.

2008 May 22 08:35 AM

[Ryan:]

Correction: the dividend was suspended. Sorry for the confusion

2008 May 22 10:51 AM

[Ryan:]

Sebastian - thanks! I will check it out

2008 May 22 10:51 AM

[pafsr:]

The author should do his homework - SOV suspended its dividend approximately 4 months ago!

2008 May 22 07:25 PM

[Ryan:]

Yes, they did. And I admitted my error. Thanks for the help.

2008 May 22 09:07 PM

[Rodin:]

I don't quite see the value considering the recent 30% dilution?
Creating more debt does not bode well for future earnings.
What happened to the prospective law suit involving Sovereign's
"401k Plan " ?

2008 May 25 08:32 PM

[jimsep:]

I am intrigued with this bank, given the recent capital raise. But I have to ask, why does the CEO still have his job? The new CFO sounds good, but why keep the CEO there who has presided over an enormous destruction of shareholder value? Can anyone point out in particular merits he has? All I see is sub par performance and financials for a long time.

2008 Jun 02 01:37 PM