The market’s impressive 30%+ rally in less than 6 months has lifted all boats, but all stocks are not created equal, and especially when everything seems like it’s going up at the same time, it makes sense to look under the hood for distinguishing single stock characteristics. The financials in particular offer an interesting illustration. As Barry Ritholtz pointed out at his blog last week, performance differences within the sector have been massive in the past 5 years. There are strong fundamental reasons for such varying price performance, which exhibit themselves in price only over a long period of time. However, over short periods of time, price can defy fundamentals, and BAC and C shares have doubled numerous times in the past 5 years, sometimes in the matter of a few months.
Most recently, the name that has caught our attention is Regions Financial (RF.)
Jonathan Weil had a good note in on Bloomberg.com last week highlighting the balance sheet weakness of RF.
The footnotes to the company’s latest financial statements tell the story. There, the Birmingham, Alabama-based lender disclosed that the loans on its books were worth $8.1 billion less than what its balance sheet said, as of Dec. 31. By comparison, the company’s tangible common equity, a bare-bones measure of net worth, was $7.6 billion.
Even in a sector full of weak balance sheets, RF stands out for its disappointing results and inability to raise sufficient capital in the last 3 years. The company is alone among banks with assets of 50bln plus to not have paid back TARP. And even taking the bank’s figures at face value, analysts estimate $0.72 of EPS for next year, or about a 9 forward P/E, are certainly not cheap by bank measures.
Regions recently completed a stock offering that raised roughly 900 million and is selling its Morgan Keegan Division to Raymond James for $930 million plus a $250 million dividend. All of this is attempt to stabilize the balance sheet and pay back their TARP money.
With such long-term weakness, fading the most recent double in RF makes sense to us, highlighting a single stock situation that is merely a beneficiary of broader market strength rather than individual business strength.
We’re taking a look at this stock and trying to find a structure that makes sense. We’d obviously also like to time it well. We’ll update this post when we make a move.