Last chance for an incredible charter offer; My banking-expert friend's areas of opportunity and final three favorite stocks; Final days in Israel

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2) Moving on, I'm finishing up my series on the banking sector today...

Over the past week, I've been sharing insights on the sector from my expert friend – the smartest bank analyst I know.

As I said yesterday, his long-short hedge fund, since inception in 2008, has returned 407%... That's 10 times the 41% return of the most appropriate benchmark, the S&P 500 regional bank index.

Despite my friend's overall bearishness toward the sector, he does own one large-cap bank, Wells Fargo (WFC) – which I discussed in Tuesday's e-mail – as well as five idiosyncratic "special situation" small-cap and even microcap bank stocks. I discussed two of these in yesterday's e-mail: Eastern Bankshares (EBC) and Ponce Financial (PDLB).

Before I turn to his final three favorite stocks, I want to share my friend's thoughts on general areas in which he regularly makes money...

One is when he owns the stock of a small bank that's acquired at a healthy premium. Recently, some of this activity, he says, is being driven by credit unions, which have an advantage as acquirers relative to their corporate-bank peers because they are quasi-nonprofits owned by their depositors (or "members").

As such, they benefit from a weird and unjustified loophole in which they don't pay taxes (the credit-union lobby spends more money than the National Rifle Association to protect this status).

The management teams of credit unions are highly incentivized to do acquisitions, in which they generally target banks with less than $2 billion in assets – almost irrespective of price – for two reasons...

First, it's not their money – the purchase is made using the equity of the credit-union members.

And second, as private companies without stock options, the main way management can get paid more is simply to get bigger.

My friend thinks the game will eventually end and large credit unions will lose their tax-free status, at which point many will convert to banks and go public... Approximately 30 have already done so.

This provides another investment opportunity because the members of the credit union get the right to buy its stock at the IPO price, before it pops. To take advantage, my friend has deposited $100 at 100 different credit unions...

3) My friend thinks Oakland, California-based Summit Bancshares (SMAL), a thinly traded microcap with only a roughly $50 million market cap, is likely to be acquired.

It holds 38% of its assets in cash, which, for a time, made management look like it was asleep at the wheel. But instead, it was smart not to buy securities or make loans at near-zero interest rates a few years ago (which is now crushing so many other banks, as discussed in last Wednesday's e-mail).

As interest rates have risen, Summit's return on equity, without taking additional risk, has soared from 3% to nearly 15%... and it's now earning $4 per share in annual profits, which flows straight through to increase book value by this amount, less the small dividend.

This should drive significant appreciation in the stock, which last closed at $40.32 per share – assuming it continues to trade at 1 times book value (and my friend thinks it could be worth upward of 1.5 times book value in a mergers and acquisitions transaction, which would be icing on the cake).

Lastly, the bank is run by its founder, who is 78 years old. When she passes, her family will benefit from the inherited stock's "step-up basis" and likely sell. This would almost certainly result in a gain... but given how rapidly book value is growing, my friend hopes she lives a long time!

4) Another attractive bank stock my friend owns is W.T.B. Financial (WTBFB). It's the holding company for Washington Trust Bank, a community bank based in Spokane, Washington, with $11.4 billion in assets.

At yesterday's closing price of $291 per share, the stock trades at only 82% of stated tangible book value and has two potential catalysts to unlock the value in what is one of the premier banking franchises in the Pacific Northwest...

The first is an outright sale of the bank, as the family-controlled institution is led by a 66-year-old CEO and there is no clear succession plan in place. Unlike most family-controlled banks where children or family are next in line to run the company, this isn't the case at W.T.B. Financial.

If the company chooses to stay independent, a likely path to create liquidity would be to switch from the over-the-counter market to the Nasdaq. That would create big demand for the shares from price-agnostic index buyers, as W.T.B. Financial's more than $700 million market cap would easily put the company into the Russell 2000 Index.

Although W.T.B. Financial's earnings have been reduced by the interest-rate dynamics affecting the sector, the bank's value is well protected by the clean credit quality, strong loan-loss reserves, and trust/wealth management business (with more than $8 billion in assets) that would be highly valuable to a potential acquirer.

5) I was surprised to hear that my friend's final favorite idea isn't a bank – it's aircraft-engine leasing company Willis Lease Finance (WLFC).

It trades at only 70% of tangible book value – and he thinks book value is understated because Willis depreciates the new engines it buys on a straight-line basis over 15 years to a 55% residual value and carries them on the balance sheet at the lesser of appraised value or depreciated value.

In reality, the value of the engines has actually appreciated over the first five years due to inflation and scarcity value driven by supply-chain disruptions.

In addition to the asset side of the balance sheet being significantly understated, Willis is well positioned for the current rate environment in that it has legacy asset-backed security ("ABS") issuance that has an all-in cost of about 5%. Willis just did another issuance this past month that has a roughly 8% cost – which will take overall funding higher – but the legacy ABS issuance is very valuable in the current interest-rate environment.

Adjusted for this, my friend thinks Willis' book value is nearly double what it shows on its balance sheet, meaning the stock is in effect trading at 35% of an adjusted book value.

In addition to being cheap on book value, strong industry dynamics and the favorable balance-sheet positioning have led Willis to earn $6.82 per share over the past four quarters.

Management owns about 57% of the company and has tried to take it private three times... but hasn't been successful. The most recent offer last year was for $50 per share, but the independent committee of board members wasn't willing to accept the offer because it thought the price was too low.

Additionally, the company has historically been very active in repurchasing shares in both the open market and via modified "Dutch auction" tender offers.

6) Picking up where I left off in yesterday's e-mail, I'm now on my way home from a very intense, emotional three days in Israel...

Part of that time involved visiting an agricultural kibbutz only a mile from Gaza that in many ways resembled a large-scale American farm – with hundreds of thousands of chickens, thousands of cows, and vast fields of crops.

When the Hamas terrorists overran it on October 7, they not only killed and kidnapped many of the kibbutz's residents, but also methodically destroyed the farm – for example, smashing the electronic controllers for the irrigation equipment and torching machinery like this brand new $400,000 John Deere tractor:

At Israel's main hospital, the Sheba Medical Center, we saw many civilians who were still recovering from burns and other injuries from October 7, as well as soldiers who'd been wounded in the fighting in Gaza.

This young soldier was chasing a Hamas terrorist into a house when he was hit by a rocket-propelled grenade that injured him so badly that he lost his left leg and was in a coma for a month:

There was also a young woman who lived in another kibbutz that was overrun on October 7.

As she, her husband, and their baby daughter sheltered in the "safe room" in their house, the terrorists shouted for them to come out so they could kill or kidnap them. When they refused to do so, the terrorists threw a gasoline bomb into the room – severely burning all of them.

Her baby and husband were in a coma for a month and she was in one for two months. Though they are all recovering well, if you look closely, you can see the compression gloves she is wearing – part of a bodysuit to protect her sensitive skin:

We also met with many parents of youths who were killed or captured on that terrible day. This couple's 21-year-old son – the same age as my (Jewish) youngest daughter – is one of more than 130 hostages still being held by Hamas:

I also visited the Western Wall in Jerusalem, which – along with the adjacent Temple Mount – is Judaism's holiest site.

Lastly, I'll repeat what I said yesterday...

Now, in case you're wondering why I care about this...

In additional to simply being human, my wife and three daughters are Jewish (I told her on our first date in 1990 that we could raise our kids Jewish – seriously!), we're longtime members of Central Synagogue in Manhattan, and more than half of my closest friends are Jewish.

And keep in mind that I do my best to keep my politics out of my investing e-mails, so please understand that I'm not expressing any opinions here about what led to the Hamas attack, whether Israel's response has been proportionate, etc.

I am simply documenting indisputable facts: Members of Hamas committed a well-planned, brutal act of terrorism that resulted in the greatest single-day loss of Jewish lives since the Holocaust (approximately 1,200). Hamas also continues to hold more than 130 hostages in Gaza today.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.