Friday Addition Edition: Banks, PE loans and Aloe Vera

Most of you have been with me for some time now and are aware that I spend a lot of time testing ideas and strategies. I get lots of ideas, and as Victor Niederhoffer once said," If it can be tested, it must be tested."

It is not enough to have the idea. The ideas that initially sounded the most brilliant usually failed miserably when math was applied.

For every solid profit-producing strategy like small, sound banks under book value and private equity replication, I test and throw away another 20 that sounded great but tested out as idiotic.

I also steal a lot of ideas. People like Tobias Carlisle of The Acquirers Multiple, Wes Gray at Alpha Architect, and Meb Faber at Cambria Funds are doing some fantastic research work, and I am not the least bit shy about co-opting their ideas.

Meb Faber is big on shareholder yield. He has written a great book with catchy Title Shareholder Yield: A Better Approach to Dividend Investing. His firm also operates an ETF called Shareholder Yield (SYLD) that has performed very well since being released in 2013.

I took Meb's Basic idea and limited purchases to companies with shareholder yields over 5% trading at a PE ratio of less than 12. I also insisted that to pass the screen, each company had to have repurchased at least 1% of its outstanding shares over the past year

Then I added an insider buying element. There has to be at least one insider buying the stock in the last few weeks.

The screen does not produce a whole lot of results, but the strategy does perform very well.

I found a lot of banks on the screen. I am only going to share one with you because we took the results and are feeding it down the rabbit hole because I think there may be something of real value here for us as long-term bank investors. When the full results are done, I will be back to you.

Seattle, Washington based Home Street Bancshares (HMST) makes the list of shareholder yield stocks. This bank serves the Western US markets with 72 branches about $7.2 billion in assets. Everything is going right for this bank as they just hiked the dividend by 67% and expanded the buyback plan by another $25 million.

Asset quality I fantastic, with non-performing assets of just .3% and with an equity to assets ratio of 10.61%, they have plenty of capital.

The shareholder yield is 10.6%, and HomeStreet trades with a PE of just 9.75 right now.

The CEO just bought $347,000 worth of shares. In addition, ten officers and directors recently exercised options and kept the shares rather than cashing in immediately, as is usually the case.

TCG BDC (CGBD) is a BDC associated with the Carlyle Group (CG)that also makes the grade. I usually value business development companies based on price to book, and TCG qualifies on that level as well. The shares currently trade at 88% of book value.

TCG provides financing to middle-market companies that have private equity sponsors. The private equity owners of their borrowers have a powerful reason to make sure the loans are repaid as agreed, as they need those companies to succeed to earn their incentive fees.

When we add the buyback ratio to the 9.34% cash dividend, we get a shareholder yield of 13.54%. Insiders have been buying all year, with the most recent purchase occurring less than two weeks ago.

The Carlyle Group is one of the top-performing private equity funds in the world over the past three decades. Their relationships with other lenders and private equity funds should help source high-quality deals that deliver outstanding returns for us as investors.

Mannatech (MTEX) is one of the few nonfinancial stocks to make the list. Mannatech is a multi-level marketing business that sells products made using Aloe Vera. They have vitamins and supplements along with skincare products. They even have an instant coffee infused with something called Glyconutrients that are said to have miraculous healing powers despite a complete lack of evidence that this is true.

While it strikes me as a ridiculous proposition, the company is growing, and the growth rate is expected to accelerate over the next five years.

No matter how silly the business may seem, they generate cash and use it to pay dividends and buy back stock. When we add the 3.08% dividend to the buyback rate, the shareholder yield for Mannatech is over 16%.

Insiders were buying a couple of months ago, and the PE is under 8, so the stock meets all the criteria no matter how much I criticize the business.

In fact, the fact that I hate the MLM aspect of the business probably means this will be the top performer on the list.

Shareholder yield is a powerful, proven way to pick stocks. We can add our own spin to the core strategy to produce outstanding long-term results.

Posted to Banking on Profit on May 21, 2021 — 1:05 PM
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