An update on three of my banking-expert friend's favorite stocks from last year
Today, I'm revisiting three stocks that longtime readers might recall...
I have one of my readers, Preston M., to thank for a reminder on them. Yesterday, he sent me this e-mail:
I have been a subscriber of yours for a few years. I read with great interest your article of 2/8/24 (My banking-expert friend's areas of opportunity and final three favorite stocks) when you discussed the recommendations of your friend that is the best bank analyst you know.
Your friend recommended Willis Lease Finance (WLFC), W.T.B. Financial (WTBFB), and Summit Bancshares (SMAL). I invested in all three. SMAL is very thinly traded and hasn't done much, but that's ok. WTBFB is solid and has performed well. WLFC has been a killer. This stock price has been just awesome. I have bought more of each when I could.
I haven't had much success in getting any news on them except annual reports. I would love to hear a follow up from your friend on his expectations from here on these companies.
Well, it has been almost a year since I last checked in with my banking-expert friend on these stocks... so I sent him an e-mail to ask for his current thoughts, and he was kind enough to reply.
As background, his long-short hedge fund, in 17 years since inception in 2008, has returned 548%... That's 3.5 times the 155% return of the most appropriate benchmark, the SPDR S&P Regional Banking Fund (KRE). As I said last year when sharing his insights, he's the smartest bank analyst I know.
Here's a chart showing the performance of all three stocks and KRE since February 8 last year:
In the chart, we can see exactly what Preston is talking about...
KRE is up a healthy 25.8%, while W.T.B. and Summit are up modestly: 9.7% and 8.0%, respectively. On the other hand, Willis Lease has skyrocketed 315%.
Again, you can see my banking-expert friend's comments on these stocks last year right here. So today, I'll share his new comments on each of them...
Let's start with Willis Lease. As my friend told me in his e-mail...
WLFC has been the biggest winner and continues to be our primary stock of interest. Of the three stocks we mentioned, WLFC is the crown jewel worthy of the most in-depth discussion.
We recall you giving your readers the advice about letting your winners run, and WLFC is a textbook example.
WLFC is the highest conviction investment we have made in our entire investing careers, and despite the stock's move higher it remains our highest conviction investment. Every aspect of the aircraft engine leasing and maintenance industry is booming due to supply chain disruptions, engine recalls, and industry capacity constraints. Even if travel slows it will likely be 3-5 years before the industry returns to a reasonable equilibrium. Willis has spent the past ten years building the business for exactly this environment and we believe the earnings growth in 2025 will confirm this.
For 2024 we expect WLFC to earn close to $20/share once Q4 is reported, and in 2025 we believe they could earn $35-$45 per share as lease rates re-price higher and maintenance revenue grows. Even a 12x multiple on the low end of this range doubles the stock from the current price.
That certainly sounds promising. And as he continued:
In addition to the actual business fundamentals firing on all cylinders, the management has undergone a significant transformation from being extremely investor unfriendly to hosting quarterly earnings calls, an institutional non-deal roadshow, a sell-side analyst day, initiating a quarterly and special dividend, and issuing an investor presentation that highlights the significant value in their business. We believe they are in the very early stages of being discovered by institutional investors, and it wouldn't surprise us if favorable sell-side coverage was next.
As outlined in the two slides below from WLFC's recent investor presentation [from October – you can see it here], they view FTAI Aviation (FTAI) as their closest public peer and FTAI trades at a $17 billion market cap and over 30X 2025 earnings estimates, while WLFC only trades at a $1.3 billion market cap and around 5X what we expect them to earn in 2025.
Up next is W.T.B. As my friend told me in his e-mail:
W.T.B. Financial is reaching an inflection point with their balance sheet as the low-yielding securities begin to mature, and the combination of reinvestment at higher interest rates and paydown of higher cost borrowings should result in meaningful earnings growth over the next 1-3 years.
The company has a stated tangible book value of $367/share which does not assign any value to their nearly $10 billion in trust assets under management. We believe the bank is an attractive takeover candidate, or could have equal upside in a listing change to the Nasdaq, which would lead to significant passive money demand. The CEO is 67 years old and we believe an event will occur prior to his retirement.
And last on the list is Summit. Here's what my friend had to say about it:
Summit is a textbook takeover candidate with a 79-year-old CEO and no clear succession plan. The bank is small enough to take advantage of the credit union industry's buying spree of community banks, and with a low cost deposit base and attractive earnings power we think a transaction could be worth 125-150% of our estimated 12/31/24 tangible book value of $41.25 or $52-$62.
One other thing worth mentioning is that SMAL paid out $1.37/share in dividends in 2024 (3.0% at the current price) and continues to be overcapitalized with over 15% common equity/assets, so additional dividends would not surprise us.
I'm not an expert in the banking sector (which is why I turn to folks like my friend for insight!) – but Willis Lease, W.T.B., and Summit still strike me as three excellent stock ideas today.
So thank you, Preston for the great question to lead to a follow up on these stocks... and a big thanks also to my expert friend for sharing insights with my readers!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.