Low Risk Idea Below Liquidation Value
Insiders buying stock handover fist, exhausted two repurchase programs, quarterly dividend and key catalyst to sell the company in just one year
My favorite stocks to invest in are the sleepy names that no one knows exist. These typically consist of extremely small capitalized companies. Non-sexy zero growth industries that don’t attract the masses. Companies trading at a fraction of liquidation value that provide strong downside protection and an attractive internal rate of return.
The never ending search for unheard of equities with low downside and attractive upside has naturally led me to invest in small community banks in sleepy towns. Small community banks offer value oriented investors an opportunity to capitalize on a rapidly consolidating industry with very little competition in public markets. Even better, most sub-$300 million community banks are unheard of to most value oriented investors and provide compelling risk/rewards for the investor who wants to put in the work.
The company I am highlighting today offers value oriented investors low downside and compelling upside.
There is a top-notch management team focused on returning capital and driving shareholder value.
The management team is buying stock on the open market handover fist
Three share repurchase programs have been announced and the second one is almost exhausted
One-year from now the company will pass a key moratorium and will be able to sell the company.
The idea is compelling and should offer investor low risk and a high return. Most investors have no idea the stock exists. And the ones who do will probably find the story to be too boring.
Now before we get into the idea, first a word from today’s sponsor…
How do we know this medical tech startup is undervalued?
Dymicron is solving a problem faced by more than 55% of unhappy spinal disc surgery patients.
Either their plastic and metal materials wear and shed toxic debris in the body, or they lose significant mobility from a spinal fusion. Of course, there are plenty of other problems in between, all stemming from the fact that there has been no durable, anatomically designed spinal disc replacement solution on the market until now.
But Dymicron is breaking the status-quo by making disc replacements out of the hardest material in the world: Diamonds.
Their patented man-made diamond disc implants allow for more natural range of motion and are:
1000X more durable than conventional plastic or metal components
~$6,000 more cost-effective long-term for patients who need spinal disc replacements
PLUS: over 500 people are already wearing them outside the US.
Now, Dymicron aims to tackle the American market – and they’re taking investors with them.
This alone represents a $1B potential market opportunity for investors. But when you consider that the company has its eyes on other forms of joint replacement in the future, the potential looks even bigger.
They’re on track to initiate FDA clinical trials this year, which can be a huge inflection point for value in any company. Plus, while Dymicron has no institutional investors, they are supported by Richard Guyer, the Orthopedic Surgeon who performed spinal fusion on Tiger Woods.
Long story short: this is the closest thing to a ground-floor opportunity we’ve seen in a while.
Become a Dymicron investor for just $5.75 a share before Wall Street catches on.
William Penn Bancorporation (WMPN) — $11.77 on 2/8/2023
William Penn Bancorporation (WMPN) is a small community bank with thirteen full-service branches in Bucks and Philadelphia counties, Pennsylvania; and Burlington and Camden Counties, New Jersey. The market cap is $165 million and is relatively anonymous to most value investors.
The business model is simple. WMPN takes in deposits and then loans the deposits out to individuals and investors in their community. The company also holds an investment portfolio consisting of high-quality bonds. As of September 30th, 2022 33% of loans were invested in commercial nonresident, 30% invested in 1-4 family single family houses, and 20% in 1-4 family investor properties.
Loans are high quality in nature with a 0.56% of non-performing assets to total assets. Total assets are $851.5 million and tangible book value (my proxy for liquidation value) is $12.12 per share. With a share price of $11.77, WMPN trades at 97% liquidation value.
WMPN is compelling as an investment because the management team is following the playbook of a mutual conversion. For newbies, there are three catalysts for a mutual conversion and almost all demutualized banks follow this playbook.
The conversion itself from a mutual bank to a public corporation.
The second catalyst is the one-year anniversary from the mutual conversion. Following a mutual conversion banks are overcapitalized and typically start to return capital to investors via share repurchases and dividends. Due to Federal regulations, a demutualized bank must wait one year from the anniversary of the conversion to begin returning capital.
The final catalyst is the third-year anniversary. When a bank converts to a publicly traded entity it must wait three years before the management team can sell the bank. Once the three-year anniversary is crossed the bank can then become a candidate to become acquired. Since the Great Recession, 70% of converted banks that passed their three-year anniversary have been acquired. The average price paid is around 130% tangible book value.
The management team has been following this exact strategy to the T:
On March 23rd, 2021 the company announced their second-step conversion into a publicly traded company. The conversion took place on March 24th, 2021 and began trading on the Nasdaq on March 25th, 2021.
Almost immediately after passing the first anniversary of the second-step conversion, March 11, 2022, the management team announced a $0.03 per share quarterly dividend and the first buyback program to repurchase 5% of the company or 758,528 shares.
On June 9th, 2022, the company announced their second buyback program to repurchase an additional 771,445 shares or another 5% of the company.
Then on August 19th, 2022, they announced their third repurchase program to buy another 5% of the company or an additional 739,385 shares.
I expect the management team to continue to be great stewards of capital and continue to repurchase shares below tangible book value while organically growing the bank through de novo bank expansions.
In addition, I expect the management team will put the company up for sale following the three-year anniversary of the second-step conversion, March 24, 2024, which is almost one-year away.
The management team is likely to continue to execute on large share repurchase programs and eventually sell the bank for a premium to tangible book value due to their large and growing holding in the equity. Since going public, several executives have purchased over $2.5 million of common stock in the company and continue to buy in the open market.
Given the history of acquisitions in the mutual bank world I expect WMPN to be sold for around 130% of tangible book value sometime in the summer of 2024 or 2025. 130% of tangible book value is $15.75 per share or a 33% upside from here.
Tangible book value has taken a hit from unrealized losses, $23 million, occurred in WMPN’s investment portfolio of bonds. As interest rates have moved up the value of these bonds has gone down. I expect these are just interest rate driven and nothing to do with the quality of the bonds.
As the bonds mature this loss should decrease and tangible book value will go back up. As an exercise, adding back the $23 million in unrealized losses we get a tangible book value closer to $13.87 per share. 130% of tangible book value at $13.87 per share is $18.01 per share or a 53% upside.
Risks include:
Interest rates continuing to move up, further deepening unrealized losses in the investment portfolio
Depositors looking to move their money to a bank that can offer more compelling rates in a higher rate environment
The underwriting quality of the company decreasing and an increase in non-performing loans
A downturn in the counties where the bank operates could reduce earnings potential
Overall WMPN is an attractive company with limited downside, stable earnings and a strong management team that wants to maximize shareholder value. I expect the company to continue to return capital via share repurchases while also paying a regular quarterly dividend. Once the third-year anniversary passes, I suspect the management team will look to sell the bank to a larger financial institution to maximize their own financial interests.
I usually don’t make my investment write-ups public but this one seemed compelling enough to highlight and I haven’t seen a good write-up on it in over a year. If you want to continue to get research on undervalued and unheard of stocks, subscribe below.
Disclosure: I am long William Pennbancorp (WMPN). I will buy or sell my shares anytime following this newsletter. This is not investment advice. I am not an investment advisor. I am not liable for any potential loss you may experience by investing in WMPN. Do your own research and make independent decisions.
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Low Risk Idea Below Liquidation Value
The bank's investment bonds are generally held to maturity, correct? If so the losses from being marked to market shouldn't matter - hopefully management isn't selling them before maturity.