Buy Opportunities Like These Do Not Come Along Very Often

On Friday, I was about to write that it appears the continuing bad news makes me want to just go sit in the sidelines and wait for better days. The housing down turn is turning into a 4 year odyssey of pain for homeowners. Gas prices are causing SUV owners to trade in for Vespas. The recession that has been forecast by many actually appears to be arriving.

Every time the stock market makes a modest gain, it gives it up and then some over the next few sessions. Stocks I believe are good values lose 50% of that value. Finally, the floods in Iowa strike close to home both personally and in regards to some of my investment choices. So by market close on Friday I was ready to pack it in for a few months.

Then I started thinking about some the the stocks that have been so disappointing and realized that opportunities like we have now do not come along very often. Many stocks are priced like their entire sector or industry is going out of business.

First, off many energy companies are going to do very, very well in this environment. My exposure is probably a little light here, but some of the stocks in my Income Portfolio should do very well over the next couple of years. Take a look at Penn West Energy Trust (PWE), Inergy (NRGY) and Atlas Pipeline (APL) for growing earnings and dividends. On the growth side, Headwaters (HW) is rolling out technologies to clean waste coal and process oil sludge into extra energy sources.

The market is also acting like every airline will go bankrupt due to high fuel prices. A well run profitable, fuel efficient airline like Copa Holdings (CPA) should pick up market share and continue to be profitable. My big loser so far is the aircraft leasing company, Aircastle, Ltd. (AYR). The stock price has been cut in half on the fears that some of its leasing customers will be turning in aircraft. One is US Airways (LCC), which has indicated it will return some leased aircraft, however, it has not been disclosed who those aircraft are leased from.

At this time AYR stock is trading at 4.5 times last years earnings and is yielding 11% on a dividend that is 55% of net income and 35% of free cash flow. Global air travel would have to have a severe meltdown to make Aircastle worth any less than it is today.

Then in financials you have a company like City Bank (CTBK) of Linnwood, WA. This is a bank with 30+ years of growing profits, is conservatively managed and is in a part of the country that has not been hit badly in the real estate down turn. There is almost no news besides quarterly earnings reports on this stock, yet it has fallen from the low $20s to $12. When was the last time you saw a quality company with a PE of 4 and a yield of 5%, just because of its industry?

I see stocks growing earnings and getting their share prices hammered because the market believes the numerous problems mentioned above will affect all companies the same. At this time it looks to me like we may not see stocks at these bargain prices for a long time.

Note: I have long positions in AYR, CTBK, PWE, NRGY and HW.

Comments

[Alex_G]

Tim,

I live in CTBK's area and have been following them for many years. They have substantial exposure to builders and raw land, which has, in some cases, decreased by 50%.

[paultaut]

From your mouth to investor ears, everyone, altogether, buy PWE which has yet to increase its dividend and has had to sell assets to keep the dividend in place.

Go PWE!

[j_remington]

CTBK has less than 3% residential mortgages. Safe to say its loan exposure is unlike most banks who have to raise cash. No dilution from stock offering planned.

Commercial real estate for the WA area has been relatively stable due to minimal overbuilding and due to thriving businesses (high % of technology and export.) Thus, less commercial construction defaults.

All in all, the valuation of CTBK is highly appealing for the investor looking to hold for at least 6 months.

[redbaron]

Oil analyst Kirk Wulff has a buy on PWE, and is not worried about it covering the dividend. Wulff is using oil at $100 for his calculations, which seems rather conservative with crude at $134, and further, he has not disappointed me in over 4 years of following his advice. I go with Wulff. His advice is free at mcdep.com, on a time delayed basis.

[Alex_G]

Remington,

Not talking about commercial. Pull their Call Report. They have substantial exposure to raw land via single family home builders.

They are known as conservative lenders and have always been over capitalized, so I don't think dilution will happen. Long term, they will be a great buy, but small banks tend to move in a pack, so adjust your time horizon out to at least 18-24 months.

[Moby Waller]

Airlines -- not a good investment in generally every environment...includin... now

[Georealist]

While the clueless and incorrect bad mouth PWE (David Bui and paulwhatever come to mind) it has now had ANOTHER up week..potential cash flow is extremely high..and...why would the dividend need to be increased when it's already yielding 12.10%???
PWE was $24 and change in January..now over $34...PLUS dividends...this includes a 14 year plus reserve base. A real dog!

[j_remington]

Under loans secured by real estate:
a.
1. 1-4 family residential construction loans 571,706
($0 charge offs as of 3/31/2008)
2. Other construction loans and all land development and other land loans 300,540
($53 charge offs as of 3/31/2008)
Dollar amount in thousands.

*from Call report

Alex, your interpretation of exposure is subjective. Do you know the profile of the borrowers in question? I don't. No one does.

Also, Goldman Sachs sees broad rebound in the banking sector starting in the 1st quarter of 2009. Well...that is 7 months away. Stock prices reflect what will happen 6 months from now. biz.yahoo.com/ap/08061...

[tfbach]

To all the PWE fans the prospects certainly seems bright if oil and nat gas stay high.With less than 10% hedged going into 2009 and assuming no production disruptions increasing cash flow should warrant a health increase in monthly payouts even after debt reduction.PWE hasn't raised their divy in some time and would say the unitholders are due for one soon.

[Jack Yetiv]

For those interested in PWE, you should look up the presentation just posted on the PWE website. In it, the CEO shows a graph that indicates that with oil at $120 and gas at $11, cash flow will be $3.2 billion this year. Deducting dividends of $1.2 billion and capex of $1 billion leaves free cash flow of $1 billion--and that DESPITE the company's low hedges.

I suspect that about $700 million of that billion will be used to retire debt to get debt-to-cash-flow ratio of 1-to-1, and that the other $300 million will be used to slightly increase dividends (which are already pretty high) and to increase drilling program.

By the way, please note that the second quarter is almost over and that oil and gas have probably averaged close to $120 and $11 this quarter. Therefore, I expect record cash flow this quarter of about $750 million, with record free cash flow of almost $200 million, and a payout ratio of about 42-47%.

If someone thinks PWE is NOT a buy, tell me what fact or what analysis I have missed above.

Jack

[paultaut]

PetroFund was increasing its dividends, PWE has not raised its dividend since it listed on the NYSE. Canetic was increasing its dividend. PWE has been totally stagnant.

Full disclosure: I have HTE,PGH,PVX and PWE.

[paultaut]

PWE has not increased its dividend since February of 06, How much has oil gone up in the interim?

Must be that the projected cash flow continues to be projected.

[iman]

paultaut, please sell your PWE if you really have some and are so upset with it. Probably just a paid basher.

[Jack Yetiv]

Paultaut, I am amazed to hear you hold HTE. Of all the Canroys, I consider that one at highest risk of cutting the dividend because last two quarter's payout ratios were over 100%. yet you complain about PWE, whose payout ratio last quarter was 58%!

Indeed, HTE cut its dividend last year from 38 to 30 cents per month, whereas PWE has paid the same dividend for over two years.

Also, HTE's refinery will prevent HTE from recording the same benefits from a high commodity price environment relative to its peers because crack spreads have been squeezed and I think will continue to be squeezed.

Jack

[davemcc3300]

How long can you stay long HW? It's never delivered on its C-T-L/nanotech/catalys... promises, is in the dumper with homebuilding, is down 72% since 8/05, yet attracts new suckers ...based on what: negative cash flow?

Sorry, Tim: you picked a loser in HW! But then, it made it easier to evaluate the rest of your recommendations.

[ACapitalist]

Jack,
An investment in any of the Can Trusts is a bet on continued high oil/gas prices. If you are convinced that prices will stay high, you will have made a good investment. If prices drop, you probably will not. Why will a drop in energy prices result in a fall in the price of these stocks (as well as Penn)? The dividends include a return of capital and they do not retain enough cash to sustain production on a flat energy price basis. The trusts have to keep issuing more shares to buy more producing properties to keep their production growing or even flat. What investors should always look at with these stocks is the production and cash flow per share. In the near term, there is nothing to worry about as the numbers you present suggest. In the longer term it’s all about the price of Oil and gas. I am not saying you should not buy Penn. I may just do so.

[Tim Plaehn]

Headwaters had years of profitable growth before they were forced out of the Section 29 synfuel business by government rule changes. The company appears to have a plan to develop new technologies and I started discussing the stock at a price near where it is today and hold a profitable position at this time. The next few quarters should tell whether management can follow through on their plans.

[ACapitalist]

Tim, Alex& Remington,
I was very interested in CTBK, read their 10q & K and could not find where their construction exposure is located. I called them and they told me that all of their exposure was local, nothing out of Washington and most in a couple of counties where they are located. I only have a general idea of what is going on in the Washington real estate market, but from what I read it is still one of the best markets in the country with little or no drop in prices due to the strength of tech and aerospace industries. Therefore it would seem that their construction book would be better than most banks in other regions? However, their nonperforming loans have been going up quite rapidly over the past 3qs. On the positive side, they have 17+% capital and a 6% net interest margin. Not many banks like that sell for 80% of book value. Any other thoughts or perspectives on the Washington market?
Thanks

[Alex_G]

Remington,

75% of their loan book is construction and land, w/ 65% of that number being 1-4 family. Very high #s. Their primary market is the suburbs and x-urbs of seattle, which are now seeing price drops anywhere from 10-30%, depending on how far away from the city you are. Most of the nation's real estate markets peaked mid to late '06, while our market peaked late summer '07, almost a year later. There will be write-offs, probably by the 4th Q. This downturn will be much more powerful than the one we experienced in 1990. I know for a fact that some x-urbs are seeing lot prices discounted as much as 50% from the peak.

I do know the profile of their borrowers, a couple are friends of mine. They are leveraged builders. The commercial part of their loan book should be firm, as that market has not seem much price deflation yet and vacancies are low here.

As far as Goldman's call goes, i really don't think they were talking about small local banks leveraged to the construction industry.

[ACapitalist]

Alex,
Thanks for the local color. I will keep my eye on this over the next few months.

[j_remington]

CTBK's customer base is located in a more stable locale and its business is superior than banks mentioned in the GS article, thus any downturn will be less damaging than what is occurring at regional banks.

My friends, industry banking veterans, agree with me that the stock price decline for CTBK is due to an emotional selloff. Also, sprinkle in short sellers who have traded down the stock based on selling momentum.

I would love to hear hard fast financial ratios and balance sheets OF CTBK customers INSTEAD of unverifiable references, blank statements and useless statistics. Anyone?

Buyers will be rewarded with a $20 stock price within 6-12 months. Shorts were correct in selling before but should be covering their positions as I write this.

[Alex_G]

My friend, an analyst who covered the stock, agrees w/ me.

If you look at the small banks that are down 75-90%, they all have one thing in common: Builder exposure over 50%. How's that for a useless statistic?

I am not saying they will fold, far from it, but the risks are very high in the sector, and the more builder exposure you have, the greater the risk.

I am not short the stock, and have been long since it was a pink sheet stock.

Many small banks will fail due to exposure to the construction industry, the first being in the Vegas, Scottsdale and Inland Ca areas. Washington will lose a couple as well.

[j_remington]

Long the stock and babbling about the negatives. What a disguise for a basher, alexa_g. hehe

[j_remington]

Long the stock and babbling about the negatives. What a disguise for a basher, alexa_g. hehe

[j_remington]

Seattle area home prices...
seattlepi.nwsource.com...

[herve villachaeze]

Regarding PWE's dividend, write this down: PWE does not want to increase the dividend (based on comments made in the last earnings release), will not increase the dividend, and should not increase the dividend. They have other plans for the cash, and at 12%, it's enough.

[j_remington]

and more
seattlepi.nwsource.com...

CTBK has less to worry

[Alex_G]

Remington,

You just don't get the metrics, do you? And you clearly don't live here, and you don't understand small banks. You know that the bank is not in Seattle, right?

[Mark Anthony]

The best things to buy nowadays are commodities. The best commodity play right now is platinum and palladium. And the best platinum and palladium players are the two little known North America mining companies.

Why platinum and palladium? You need to know what's happening in South Africa:

seekingalpha.com/artic...

[j_remington]

alexa,

You have been identified. he he

Are you resorting to personal attacks now?

At

[jjason]

Jack, I think oil prices are going to drop when margin requirements are at 50% and speculators stop trading in futures contracts. Also, PWE has about One Billion dollars on the balance sheet in goodwill.

In today's PWE news they are going to sell 20,000,000 more units at whatever price they can get...Diluting current unitholders.

If the US economy is going deeper into recession and US consumers continue to cut back on driving and oil demand drops then oil companies share/unit prices will drop too.

Frankly, I hope lots of speculators in the commodity futures trading game lose lots of money.

I am neither long or short oil or anything to do with oil.

[Tim Plaehn]

Thanks for the info on CTBK, I am considering buying more here below $10. Still kind of fishing for a bottom.

[TedPa]

PWE is in the final days of its best quarter ever, and half way thru its best year ever. Cash flow is the highest ever, and world demand for crude can be expected to remain stong, which should sustain crude prices near $100, at least.

So what is there on the near-term horizon that could change this scenario, that could render mining tar sands and oil shale uneconomic? The next president and congress appear to be tree huggers and so, coastal and national reservations that have high crude oil production potential appear to have only a very remote possibility of providing some relief to the United States.

If we do have a major "surprise", I expect that it will be a bad thing for our nation, but would inversely affect oil prices. That is, war between Isreal and Iran, which no one in their right mind would want to see.

If Israel is going to act, it would most likely be before President Bush leaves office, since he is a known quantity.

[tjohn]

I am looking at CTBK to buy... if trouble was brewing why would they pay the $1 per share dividend in December? Also, if not CTBK, what regional banks look best?

Alex- if you still like the stock despite short term issues, where would you buy it at?

[Drooling Elmo]

I have 50% of my portfolio in BPT, PBT, PVX, PWE and LGCY and every month when those dividend checks come in I say hallaluyah all the way to the bank. To boot I have owned all of these for 5 years or more, so they have shown decent gains even without the dividends.

[boneys dad]

Thanks for the comments onCTBK. It showed up along with AB on one of my screens this weekend. I will place limit orders this weekend at $9.23 and hope an overshoot on its previous lows. This should be a good entry point even if it continues to drop. The Dec. dividend should attract some buying interest soon from the hogs. Technically it is near a short term bottom. I think on the otherhand AB needs to drop much lower before I'm interested.

[Alex_G]

Tjohn, Boney,

The market last week finally woke up to the issue of builder loans outside of vegas, FL, AZ and central CA. yes, i still have small legacy positions in a few of these stocks, but for the most part got out when they were 150% of historical metrics.

Here's my problem with buying CTBK now: 75% land and construction loan exposure scares the living shit out of me. I would rather buy it at $15, knowing the worst is behind them, than buy them under $10 while they are still falling, not knowing what is coming up in builder loan losses.

And the problem with builder loans is the same everywhere in the country: Builder borrows to buy land or lots w/ 35% down, LTV of 65%. At 35% ormore lot value drop, builder is at 0 or negative equity. Banks now will not loan the rest to finish project, so builder has to carry out of cashflow or sell. Builder needs to build to have cashflow. Other builders can't get financing to buy the land. You get the picture. This is what has been happening so far in 2008 in the first parts of the country to have the real estate bubble burst. We are late here, but it is coming, at least to some degree, to what at this point we don't know.

So, when would i buy? I will re-enter these stocks when they reach option price or i feel that builders can get loans again to finish the projects they started.

The 3 i will look at the hardest are FTBK, CACB and CTBK.

[boneys dad]

Alex, Your arguments are sound, there will be plenty of time to buy this stock when the worst is behind it. I am over 70% in cash myself. I got in early during the s&l crash, signet bank at $14-12. It bottomed around $8-9 if my memory is right but turned out to be a 6 banger when it was bought out 3 years later. I'm usually early. Admittedly I would prefer a capitulation and reversal in the financials but looking at this unemotionally, the bank earned $2.50 to $2.60 when the share price was at $30. What will it earn over the next 12 months? Is the dividend solid? What are the shorts likely to do as the stock moves higher? I don't have a crystal ball. The one thing missing for me is no insider purchases. If/When that starts back up the truck. It would also help if options were available to provide some insurance.

[long cse]

Tim Plaehn and Jack Yetiv both give solid analysis and insight into PWE's current and future earnings potential. Since this article the stock has moved very little when oil went up but pulled back dramatically just this week when oil dropped, losing nearly 20% in the past several days. Do you still like this stock given market conditions today and would you be a buyer at around the $30 level?

Also I believe Tim touched on HW as a possible buy. I've lost a lot of money on this one (50%) and wondering if it's time to double up or dump it. Appreciate any insight you two might have.

[Bast2000]

Tim, I have to thank you!
Following your article I went and bought AYR and CTBK. I took a quick look and nothing led me to believe their dividends were significantly at risk so I took a shot with