True Wealth Alert: Hundreds of Percent Upside, Little Downside
By Dr. Steve Sjuggerud
October 25, 2007
In 1965, a small business got going in Birmingham, Alabama. After a few decades of local success, the company went public in the mid-1990s, raising $13 million.
John Holcomb became the public face of this company – the chairman and CEO – in 1996. Since he took control, the market value has grown to $1.6 billion. Specifically, the company has grown its earnings and book value at roughly 25% per year... an extraordinary compound annual rate of growth.
You might think that growing his business at a 25% compound annual growth rate for a decade would take some sort of extraordinary product or some exceptional management wizardry from John Holcolmb. It didn't.
In his latest annual report, John Holcomb outlined his dazzling, highly technical strategy:
"We believe we should be able to lend money, and get paid back all of the principal with interest."
Wait a minute... What's so dazzling and technical about that?
John, as you might have guessed, runs a bank. The name of the bank isn't dazzling either: It's Alabama National. And John's not-so-technical strategy is to lend money and not lose it. Complicated, eh? It obviously works... Alabama National is a moneymaking machine, and it only gives out a tiny number of bad loans each year.
Alabama National earns close to a 4% interest margin. The interest margin is the difference between what it earns on loans and what it pays out on deposits. The 4% "spread" and John's simple strategy have helped the business grow like a weed with remarkable consistency.
The first table below shows the "weed-like" growth – compounding at an unbelievable 25% a year. And the second table shows the remarkable consistency.
Through good times or bad, making safe loans and earning a spread works.
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Compound annual growth of about 25% per year...
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Alabama Natl. |
Earnings |
Book Value |
1997 |
$12 |
$98 |
1998 |
$17 |
$131 |
1999 |
$22 |
$138 |
2000 |
$24 |
$163 |
2001 |
$28 |
$208 |
2002 |
$36 |
$235 |
2003 |
$41 |
$279 |
2004 |
$55 |
$530 |
2005 |
$67 |
$572 |
2006 |
$80 |
$854 |
|
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($ in millions) |
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...in as steady a business as you can imagine
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Alabama Natl. |
Return on Assets |
Return on Equity |
1997 |
1.1% |
14.2% |
1998 |
1.2% |
15.2% |
1999 |
1.2% |
16.5% |
2000 |
1.2% |
16.2% |
2001 |
1.1% |
15.3% |
2002 |
1.2% |
16.1% |
2003 |
1.2% |
16.0% |
2004 |
1.2% |
13.5% |
2005 |
1.2% |
12.1% |
2006 |
1.2% |
11.2% |
Average |
1.2% |
14.6% |
High |
1.2% |
16.5% |
Low |
1.1% |
11.2% |
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You'd think that a company putting up these extraordinary numbers, with this kind of consistency, would be overpriced. Instead, thanks to the credit crunch, shares of Alabama National recently fell to just about their lowest value in history. As recently as two months ago, shares of Alabama National traded at just 1.2 times book value.
Looking back, that was a tremendous bargain. We're talking about a family business really – with the same guys behind it for decades. It makes simple loans. This business was not at risk in the credit crunch.
Two months ago, Alabama National was your typical regional bank. It was trading at 13 times earnings and paying a 3% dividend. That was quite a decent value for a regional bank...
Then, boom! The Royal Bank of Canada jumped in and bought Alabama National. RBC paid 45% more per share than the stock price was the day before RBC bought it. That means that RBC paid about 20 times earnings and about two times book value. Shareholders of Alabama National walked away with a one-day windfall of 45%.
I would love to own a pile of Alabama Nationals... at pre-takeover values, of course. The great thing is, after this summer's credit crunch, plenty of 'em are out there...
For example, Synovus, a financial company based in Columbus, Georgia, owns 39 different community banks... 39 different Alabama Nationals. The banks it owns get to keep their local names, their local branches, and their local managements. (Synovus likes to keep the small-town feel.) The banks are primarily in Georgia, South Carolina, and Alabama.
Synovus now trades at 13 times forward earnings and pays a nice 3% dividend. If you recall, Alabama National was trading at these same values before RBC bought it for a 45% windfall profit to shareholders.
In tomorrow's DailyWealth, we'll take a look at just how cheap these banks are, and why you could safely make hundreds of percent on this idea in the next few years.
You see, if you're going to make hundreds of percent gains with your investments, you can't buy what's already popular. By then, it's too late. Instead, you've got to buy what investors have discarded... what they're completely ignoring... or what they're thoroughly afraid of buying. Right now, in small banks, we have that opportunity.
Until tomorrow,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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