I'm not sure where the term
"harder to find than a needle in a haystack" first originated,
or why anyone would look there in the first place. But that's
what it must feel like for frustrated investors in search of
that rare company unscathed by this vicious economic downturn.
From retailers to commodity producers, just about every industry
has suffered some degree of slowdown -- it's just a matter of
how slow. Look all you want, but there just aren't too many
businesses that are still humming along and churning out record
profits these days.
So imagine my surprise when I recently uncovered a tenacious
little company whose earnings climbed for the 10th straight year
in 2008 -- a whopping +50% increase at that. And this was no
creative accounting gimmickry. In fact, the firm had the
financial stamina to increase its dividend payments all four
quarters last year.
So what is this recession-proof business? A regulated utility
unfazed by the sluggish economy, or maybe a counter-cyclical
discounter like Family Dollar (NYSE:
FDO) that is feasting on these
conditions. Not exactly. What if I told you it was actually a
savings and loan that specializes in mortgage lending.
Sometimes truth is indeed stranger than fiction.
The company in question is Hudson
City Bancorp (Nasdaq:
HCBK),
a tight-knit thrift that manages 140 branches spread throughout
affluent regions of New York, New Jersey and Connecticut. The
firm has been around since the Civil War, but few know of it
outside its home turf.
So what makes
this particular bank unique?
Well, for
starters it has been ranked one of the nation's three strictest
mortgage underwriters. Management never fell prey to the
subprime
mortgage mania, balked at exotic option adjustable-rate loans,
and refused to even dabble in auto or credit card lending.
Instead, the
company deals primarily with wealthy customers sporting top FICO
scores who can make hefty down-payments and easily afford their
monthly notes. In fact, the firm's branches are concentrated
within 10 of the nation's top-50 counties in terms of median
household income.
This
conservative approach has kept Hudson City at arms length from
the problems plaguing other banks -- it said "thanks, but no
thanks" to government TARP money. And because the firm doesn't
package and sell its loans to investors (or invest in private
mortgage-backed debt) it hasn't run into liquidity issues or
been forced to take write-downs because of problems in the
secondary market.
Amid the
greatest crisis for the banking industry since the Great
Depression, Hudson City reported bad debt charge-offs of just
$4.4 million last year -- a trivial 1/100 of 1% of its $29.4
billion loan portfolio.
But cautious
lending is just one reason why the firm has thrived during this
downturn. Much of its success can be traced back to an
industry-leading efficiency ratio below 20%. That means this
lean organization needs just $0.20 in overhead to bring in
$1.00 in revenue -- by comparison, the average large bank
has a bloated ratio three times that size, or about 62%.
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That efficiency enables Hudson City to offer better rates to
prospective customers -- higher yields for depositors and
lower interest rates for mortgage borrowers.
Despite all
the turmoil, the firm originated more than $5 billion in new
loans last year. Meanwhile, customers flooded the bank with $3.3
billion in new deposits. Remarkably, the average Hudson City
branch now holds roughly $145 million in deposits -- double the
national average of around $70 million.
Customers
certainly recognize Hudson City's sterling reputation. In fact,
the bank gained share in 20 of its 22 markets last year.
Unfortunately, investors have painted the stock with the same
brush that has tarnished the rest of the banking industry.
Despite posting record first quarter profits that were up +44%
over last year, the shares have still wilted below $13 -- down
from a peak above $20.
But there's a
good reason why
HCBK has
vaulted +935% since its
IPO
in 1999, versus a -20% drop in the Dow.
it speaks
volumes that when most other banks have slashed or eliminated
their dividends, Hudson City has raised its distributions
six times
since this mess started. Looking ahead, a steeper yield curve
should translate into fatter profits -- net interest margins
have already widened considerably.
Plus, let's
not forget that industry consolidation has thinned the herd and
left even more business on the table. There aren't too many
other lenders hunting in Hudson's "jumbo" mortgage stomping
grounds.
My discounted
cash flow models suggest a fair value in the low $20s. So in
addition to a generous yield near 5%, investors could see upside
potential of +80% or more.
Who would
have though that under all that hay, the needle would turn out
to be a bank?
-- Nathan Slaughter
Editor
Half-Priced Stocks
Nathan Slaughter
Editor
Half-Priced Stocks
About Half-Priced Stocks
Written by value investing expert Nathan Slaughter,
Half-Priced Stocks is a monthly newsletter designed to help
readers identify securities that are trading at the steepest
discount to their intrinsic net worth. In some cases this
discount can reach up to 50% or more, giving savvy value
investors the chance to purchase quality stocks for just pennies
on the dollar. (Learn
More)
About Nathan Slaughter
Nathan Slaughter
has developed a long and successful track record over the years
by investing in both exchange-traded funds (ETFs) and deeply
discounted value securities. When it comes to ETFs, Nathan has
created a proprietary ranking system that helps him zero in on
today's most promising funds. And on the value front, Nathan
uses advanced discounted cash flow techniques, along with a host
of fundamental research, to uncover quality stocks that are
trading well below their actual intrinsic value.
Nathan's previous
experience includes a long tenure at AXA/Equitable Advisors,
where he provided comprehensive investment advisory services to
small businesses and high net-worth clients. He also honed his
research skills at Morgan Keegan, where he performed asset
allocation, retirement planning, and consultative portfolio
management services.
Several years ago
Nathan switched gears and decided to devote his time exclusively
to financial analysis and writing. He has since published
hundreds of articles for a variety of prominent online and print
publications.
Nathan's
educational background includes NASD Series 6, 7, 63, & 65
certifications, as well as a degree in Finance/Investment
Management. He currently resides in Shreveport, LA with wife
Julie and sons Aidan and Riley.
To learn more
about Nathan's value investing newsletter -- Half-Priced
Stocks -- please
visit
this link.
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What's Cooking
Americans are eating more
food prepared at home, and pure-play grocery stores saw
same-store sales growth of more than +4% in the fourth
quarter of 2008. But which of these restaurant chains
just announced a first quarter 2009 revenue increase of
+16% and a net income increase of almost +47%?
A.)
McDonald's (MCD)
B.)
Starbucks (SBUX)
C.)
Chipotle (CMG)
D.)
Cheesecake Factory (CAKE)
E.)
Chuck E. Cheese (CEC)
(Please click on one the
links above. After you make your choice, we'll show you
the correct answer on our web site.)
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Visit this link to read additional articles from today's
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 Paul Tracy
Co-Editor
TopStockAnalysts Digest
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