My bank-analyst friend's extraordinary stock picks; Update on Willis Lease Finance; The bear case for Carvana; A 58-year-old is playing college football
1) Over the past few years, I've shared bank-stock ideas from the smartest bank analyst I know – first on May 4, 2023, then in 2024 on February 6, February 7, and February 8.
I wish he'd allow me to identify him so he could take a bow, but he wishes to remain anonymous. All I can say is that he has been investing exclusively in the financial sector, long and short, for more than two decades at a hedge fund with an exceptional track record.
To understand why I listen to him, take a look at the table below... It shows the extraordinary performance of his stock ideas that I've shared with my readers:
(Note: Prices and returns for the stocks and index are adjusted for dividends.)
As you can see, there's not a single stinker among these stocks. On average, they're up 137% compared with only 52% for the S&P 500 Index.
2) I checked in with this friend last night to ask what his current favorite stock is... Unsurprisingly, it's still Willis Lease Finance (WLFC).
I've shared his thoughts on this stock a half dozen times over the past 21 months (archive here). During this period, it has gone from less than $50 to a 52-week high of around $230, and back down to yesterday's close of $121.96:
Here are his latest thoughts on the company after its third-quarter earnings report:
WLFC remains our single highest-conviction investment as the airplane spare engine market continues to experience a massive supply and demand imbalance.
The earnings report confirmed the favorable trends and outsized revenue growth, but several one-time items related to compensation and an elevated tax rate caused the headline earnings number to disappoint some investors. Still, the core earnings power in the third-quarter numbers shows approximately $5/share (~$20 annualized run rate) and we expect that number to continue to grow towards $30-$40/share annually in the coming years as leases reprice higher and new equipment is leased.
As he continued, the company's value far exceeds its current market cap:
At the current price of $122/share, WLFC's market cap is only $831 million. Yet they have $650 million of stated common tangible equity, and the appraised value of their equipment in excess of carrying value at 12/31/2024 was $600 million (as reported by the company). Based on current market values, we believe it is well over $700 million today.
Further, WLFC has $103 million of accrued maintenance reserves that have been earned but not yet released. (Once the engine is returned, they are able to book this income. But given the massive shortage of engines, nobody wants to return an engine, so this continues to accrue.)
Lastly, we believe their order book of engines that have been contracted for at below-market prices but not yet delivered is worth approximately $150 million.
The total of these items is over $1.6 billion, and this places zero value on their maintenance/repair/overhaul business, a joint venture they have with Mitsui, and the significant franchise value they have built through their contracts, relationships, and access to the asset-backed securities market.
This illustrates how incredibly cheap the stock is at its current price:
So, in summary, the company is trading at around half of its liquidation value and around 6 times what we believe to be their current core earnings power and well under 5 times what we expect the earnings to be a year from now.
Additionally, if the company were to be sold to the highest bidder today, we believe the value could easily be triple the current price.
Commenting on the closest peer company, AerCap (AER), my friend wrote:
An additional data point that supports the sector's strength was AerCap's third-quarter earnings. The stock moved nearly 9% higher, and their commentary on the conference call confirmed the industry trends that we are seeing with WLFC.
(AerCap's third-quarter press release is here, and a transcript of the conference call is here.)
My friend concluded:
Many skeptics believe the supply/demand imbalance for engines is temporary, but all industry data leads us to believe we are more than five years away from the supply/demand imbalance ending. An engine ordered wouldn't be delivered until 2031.
WLFC has an extreme amount of scarcity value in an industry with high barriers to entry and would be an extremely sought-after acquisition target. But even as a standalone, the stock should be trading double where it is today.
Thank you for sharing your insights and your best stock idea!
3) I also asked him for his favorite short idea, and he replied:
You left Carvana (CVNA) off your "Stinky Six"! We think it could be a bankruptcy.
They are super promotional so the stock could go anywhere in the short term...
But one thing that isn't being discussed is that the subprime auto asset-backed-securities market is showing some pretty big signs of stress and spreads are starting to really widen. If the asset-backed securities market turns off for Carvana, it could really unravel...
Plus, everything about this company is suspicious – there are so many things that just don't pass the sniff test.
(To reiterate what I've said many times, I don't recommend anyone short stocks. My advice is to simply avoid them.)
For more on the bear case for Carvana, see this report from January by Hindenburg Research: Carvana: A Father-Son Accounting Grift For The Ages.
Also, see this Bloomberg interview from June with legendary short seller Jim Chanos: Jim Chanos on Bull Market, Tesla, Carvana and Michael Saylor.
4) As another guy approaching 60 years old doing epic things to fight Father Time, I loved this story in the Wall Street Journal from last month: He's 58 and Trying to Break Into College Football. Is Basketball Next? Excerpt:
Tom Cillo admits it: There are days when he actually feels 58 years old.
"Some mornings, I open my eyes, and my body and mind start having a conversation," he tells me. "My body says: 'Let's just pump the brakes a little bit.'''
Creaky starts are a common ritual of aging. But Cillo, who turns 59 in January, has put his body through extra tumult this fall:
He's playing college football.
This isn't a one-off gag or stunt – Cillo's actually doing this, practicing at nose tackle, full pads and a helmet, for the Division III Lycoming College Warriors in Williamsport, Pennsylvania.
I can't wait to read about his debut in his first varsity game!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.