Stock Review: City Bank

Tuesday October 30, 2007 • Leave a Comment

Not Citi, but City Bank (CTBK: 15.22 -0.12 -0.78%). City Bank is based in Linnwood, WA with a total of 8 branches and assets of just over $1 billion. In my search for profitable small cap stocks this one really fits the bill, and the recent market turmoils that have especially affected financial stocks has knocked the price down to a level not seen for two years and 30% off the recent high.

Here are some of the facts that I find attractive about the stock:

Growing dividend: Currently at a 2.5% rate and growing. Also the company has paid special dividend on almost an annual basis. Dividends have been paid for at least 10 years.
Return on assets in the 3.5 to 4% range historically vs. competitor average of 1.3%.
97% of loans are commercial or real estate construction. Only 3% are real estate mortgages.
Loan losses have been 10% of the peer average and loss reserves exceed the peer average.

This company has show strong growth of both assets and profits throughout its 30 year history. The current credit “crisis” will probably slow the growth for a couple of quarters, thus affecting the stock price negatively. The return to more typical growth should cause the stock price to do very well.

I have long been a fan of small well run banks. If they are well run they can be extremely profitable and it appears City Bank is such a bank. Also, when these small banks break the $billion asset mark, as City Bank did in 2006, they often become buyout candidates at very nice premiums. I am adding City Bank (CTBK: 15.22 -0.12 -0.78%) to my 20 Stock Portfolio.

I currently do not own any stock in CTBK.

Wayside Technology reports disappointing quarter

Friday October 26, 2007 • Leave a Comment

Wayside Technology (WSTG: 10.11 +0.36 +3.69%) released their 3rd quarter earnings yesterday, and sales and profits were down from 2006. Revenue decreased 14% and net income per share fell a penny to $.18. Year to date revenues are up 5.6% and per share earnings up 20%. Of course, the stock is down 12%.

The decrease in revenues is due to the company not chasing low margin VMware sales. These sales are a third of the companies revenue, but with the growth of VMware, others are selling the product at much lower margins than Wayside will accept. WSTG actually improved profit margin during the quarter.

Wayside’s problem, as I see it, they are selling a value added approach in a commodity market, with competitors who will sell at very slim margins. The conference call sounds positive that they can build value in their sales, but the results have been disappointing for the last couple of quarters. This is a very small company with large competitors. Can they remain profitable and build revenues at the same time? That is the $2 question.

I own a small position in WSTG and plan on keeping it for at least another quarter. I would like to see an upward trend in revenues by next quarter. In the mean time they declared another 15 cent dividend, giving a 4%+ yield on the stock.

Wayside Technology is a component of my hypothetical 20 Stock Portfolio.

Agean Marine pulls back

Friday October 26, 2007 • 1 Comment

Agean Marine (ANW: 42.71 +0.53 +1.26%), a member of my 20 Stock Portfolio, made some pretty wild gyrations. When I reviewed the stock on Sept 14 the price was about $26, it then proceeded to go generally nothing but up, peaking at $48 on Oct 18. Too bad I did not actually buy some! Over the last week, however the stock has fallen to $36 before recovering today to around $41 and a 1/2.

The gyrations seem to be a result of the major stockholder registering to sell 7 to 8 million of their shares. The company has also announced a quarterly earnings report to be released on Nov 7. I think ANW has excellent long term prospects, but it appears any short term earnings surprises (positive ones!) have been built into the stock price. Several Wall Street analysts have jumped on the bandwagon lately, increasing my concern over the short term price. Not that I really have a concern, I do not own any stock yet. I hope to in the near future, and a strong price pull back would be welcome to me personally.

I have started the 20 Stock Portfolio to track through this blog stocks I find of value and interest. Most of the stocks I own are in the portfolio but I do not own all of them.

Thornburg CEO buys 1 million shares in company

Monday October 22, 2007 • Leave a Comment

Thornburg CEO buys 1 million shares in company | News | Market News | Reuters

I think this shows his faith in the future of the company.

My 20 Stock Portfolio gets an ETF

Monday October 22, 2007 • Leave a Comment

I am a contributor for Ecotality Life, where I write posts about green/alternative energy investments. I check several alternative energy and green news sites regularly for new ideas to write about and have found one to add to my 20 Stock Portfolio on this blog. I have found there are a significant number of very progressive and profitable alternative energy companies that do not trade on the U.S. Exchanges, or maybe as unsponsored ADRs in the pink sheets. So I was pleased to discover the PowerShares Global Clean Energy ETF, PBD. This ETF tracks the WilderHill New Energy Global Innovation Index, symbol NEX. Some facts about the ETF:

The NEX currently consists of 88 stocks from 21 countries traded on 25 different stock exchanges.
Weighted region breakdown:
- 48.3%: Europe, Middle East & Africa
- 34.0%: The Americas
- 17.7%: Asia & Oceania
The top sectors of renewable wind, solar, bio-fuels and other renewables make up 73% of the portfolio by weight.
No holding is allowed to exceed 2.5%. The top 10 are 25% of the portfolio and the portfolio is rebalanced quarterly.
The index has had a 3 year annualized return of 36.9%. The ETF has been out since the end of June 2007.

I had previously looked at the Market Vectors-Global Alternative Energy ETF, GEX, but found the index it mirrored had only 30 stocks and was a bit top heavy. The top two stocks are 20% of the index and all of the stocks are from North America and Europe. PBD is much more diversified. GEX has outperformed PBD since the latter debuted, but as we all know past performance puts no money in the brokerage account.

So for its diversity, access to non U.S. traded stocks, and broad exposure to alternative energy companies I am adding PBD to my 20 Stock Portfolio.

The 20 Stock Portfolio is an hypothetical portfolio to track stocks I am interested in for this blog. I own some but not all of the stocks in the portfolio. I currently do not have a position in PBD.

No 3rd Quarter Dividend from Thornburg Mortgage

Thursday October 18, 2007 • 2 Comments

Thornburg Mortgage (TMA: 0.73 +0.02 +2.82%) had their 3rd quarter conference call yesterday and it was not pretty. Readers of this blog know I have been a proponent of TMA and thought the stock would have a nice positive bounce with the announcement of a nice 3rd quarter dividend. Well, no dividend this quarter! Stock is down to around $10. Here are some of my notes and impressions of the conference call:

In the month of August the company was forced to sell $16 billion of their mortgage securities because of the mortgage securities market “dislocation”. TMA had a significant portion of their portfolio financed by reverse repo funding that they were unable to roll over or had margin calls. An additional $5.5 billion in securities were taken or kept by 3rd parties with no recourse to Thornburg. The company used the proceeds from the sale of assets to meet all of their margin requirements. The loss on the $22 billion of disposed assets came in at $1.1 billion or almost $9 per share.

Repo borrowings were reduced from $35 billion to $12 billion.

The company was unable to fund new loan originations until late September. Thornburg did fund a total of $1.3 billion in mortgages in the 3rd quarter, mostly before the market meltdown. Mortgages in the pipeline now total only $128 million vs. the $830 million in the pipeline at the end of the 2nd quarter.

The board of directors elected not to pay a dividend for the 3rd quarter to hang on to the cash in case of further credit disruptions. Larry Goldstone, Pres. & COO commented a couple of times about their worries concerning securities held in structured investment vehicles that if dumped could cause additional marked disruption.

So what does this mean for Thornburg Mortgage:

The company’s assets have been reduced by about 40%. A few years ago their primary business was buying mortgage securities and making money on the spread. TMA then started their own mortgage origination business and now the in house originations make up about 1/2 ($17 billion) of the portfolio.

The goal of $400 million of new originations per month will fuel new asset growth. The relationship with Thornburg’s lending partners is still intact, but the company has a lot of fence mending to do with said partners to start filling the pipeline again. I think this is the company’s biggest challenge: generating significant mortgage originations in a tough housing and mortgage market.

Larry Goldstone stated he believes the company can generate a 14-17% ROE. When/if dividends resume in the 4th quarter he indicated a rate of 25-35 cents per quarter. They had liquidity to pay a 20 cent dividend for the 3rd quarter if they had elected to do so.

Thornburg has funding sources available to continue growing their assets. On going emphasis will be more permanent financing of their mortgage securities, i.e. no margin calls or monthly roll overs. Currently $21.6 billion of the portfolio is financed this way.

So what do I think this means for TMA?

The company will survive as noted by Business Week. The business has shrunk by 40% due to forced sale of assets. They are in one way starting with a new, smaller business with more of an emphasis on loan origination vs. the old company which primarily invested in mortgage securities with a smaller part of originations.

The dividend starting in 2008 will be about $1.00 per year, giving a yield on the current price of about 10%. I was expecting them to be able to pay $1.50 to $2.00 so the prospect for a near term significant price increase have all but disappeared.

If the company can still be a significant mortgage originator at better margins than the recent past, the company should be able to grow the assets and dividend. An investor really needs to look at where the company is right now and decide if they can accomplish their goals. CEO Garrett Thornburg and Larry Goldstone are big shareholders. Mr. Goldstone stated they both have purchased additional shares before and after August and believe in the future of the company.

As stated above, my belief the stock price would have a significant near term gain was mistaken. However, I plan on retaining the shares I own with a change of goals towards a longer term prospect of growing dividends and share price. I have long believed the Thornburg management had the ability to learn from changing market conditions and will again this time.

If I did not already own stock in TMA I would probably wait until the dividend was actually re-established. If the dividend comes back at the indicated rate, the share price will probably stay near its current level. I may sell call options to generate some income in the next couple of months.