Bidding War for Sunnyside Bancorp ($SNNY)

We mentioned last month that "An Old Oddball Stocks Idea Ha[d] Its Day" with the sale of Sunnyside Bancorp, Inc. Today, a different buyer announced that it has a higher bid (20% premium) for Sunnyside.  

Rhodium BA Holdings LLC (“Rhodium”), a New York-based investor, which through its special purpose subsidiary OppCapital Associates LLC beneficially owns approximately 9.82% of the outstanding common shares of Sunnyside Bancorp, Inc. (OTCBB: SNNY) (“Sunnyside” or the “Company”), today sent a letter to the Company’s Board of Directors presenting a fully financed proposal to acquire Sunnyside for $18.50 per share in cash.

Over the past twelve months, Rhodium has privately approached the Company with multiple expressions of interest to acquire the Company on attractive terms, which were rejected without explanation by Sunnyside’s Board of Directors. Rhodium’s current offer represents a 23% premium to Sunnyside’s closing price on April 19, 2021, a 19% premium to the price offered by DLP Bancshares Inc. and a 50% premium to the Company’s unaffected share price on March 16, 2021 prior to the announcement of the DLP Bancshares Inc. offer. 

In its open letter to Sunnyside, Rhodium seems to be threatening to do a tender offer if their bid is rejected.

Third Amended Complaint Filed in Life Insurance Company of Alabama Shareholders' Lawsuit

Earlier, we mentioned that there was an Eleventh Circuit Court of Appeals ruling that was favorable to the minority shareholders suing Life Insurance Company of Alabama, which resulted in the federal court in Alabama ordering the shareholders to file file one final amended complaint against the company and its directors. That third amended complaint has now been filed, so we thought we would quote from some interesting sections:

  • In some cases, a large book value discount at an insurance company might indicate an asset quality problem, suggesting the company's assets were not worth their carrying values. However, LICOA's assets then and now consisted primarily of a rather “vanilla” corporate bond portfolio managed by outside advisers. The distress that the market price of the non-voting shares was (and is now) implying is managerial in nature. As discussed herein, it would ultimately be revealed that a group of relatives took legal control of LICOA by owning a majority of shares and have used and continue to use this control inequitably to the detriment of minority shareholders. Interestingly, during the pendency of this litigation, that discount seems to have widened and narrowed based on the market perception of Plaintiffs' likelihood of success in the litigation, indicating that it is indeed the inequitable conduct causing the distressed trading price of the non-voting shares.
  • The economic purpose of an insurance company, from a shareholder perspective, is to raise funds from policyholders and invest them at a profitable spread. Using borrowed money (“Float”) from the insurance customers as leverage and investing it in a bond portfolio ought to offer shareholders a higher return on their capital. But because the controlling shareholders of LICOA overpay themselves and otherwise waste money, the return on equity that minority shareholders receive is lower than the underlying yield on the bond portfolio. The minority shareholders bear all the risk of an insurance company's financial leverage (where the total assets are approximately three times the shareholder capital) but without the benefit of any increased return.
  • Causey’s husband Michael—who also works for LICOA—has had a similar social media presence, claiming to “Live in Alabama, but rarely there! Love traveling the globe in search of the best life has to offer...”. Like his wife, Mr. Causey also posted pictures of a lavish lifestyle of global travel and extravagance. The problem with the Causeys—and their family members who are also Director Defendants in this case—is that consistent with their social media profiles, their interests lie with funding and maintaining their lifestyles – not the interests of the shareholders of LICOA consistent with their fiduciary and statutory duties.
  • Even though Daugette is the Chairman of LICOA and his brothers-in law Lowe and Renfrow have subordinate titles, each year they are paid virtually the same amount. In 2019, LICOA began paying Causey a matching amount as well. For four executives of varying tenure, title, and seniority to receive virtually identical compensation shows that LICOA's compensation is not based on the market value of services rendered, but rather it is a de facto family dividend. The controlling shareholders have hired each other and split a disproportionate share of LICOA's profits according to a negotiated scheme amongst themselves. Tellingly, LICOA does not have any board minutes, compensation studies, or any documents whatsoever that explain how these nearly identical compensation levels were established.
  • After this litigation ensued—and after Terry Jacobs, whose family members are LICOA shareholders (“Jacobs Shareholders”), was disclosed as a witness and potential plaintiff—Defendants caused LICOA to purchase the Jacobs Shareholders’ shares at nearly three times the then-trading value of the LICOA shares (i.e., much closer to the book value). See Exhibit I. Near the same time, Director Daugette was purchasing the shares of other, uninformed shareholders at much lower prices, demonstrating how the Director Defendants game the system to keep share prices artificially low for their own oppressive repurchasing scheme, even though they know that the true value of the shares is much higher, as exhibited by the much higher price paid for the more knowledgeable Jacobs Shareholders' shares.
  • The Daugette, Renfrow, and Causey family members receive extravagant six figure salaries, some of which is for “no show” or “no work” jobs, and all of this excessive compensation is a de facto dividend that shareholders who are not family members do not receive. See Exhibit K. This compensation has been rising even as the company's profitability has deteriorated in recent years. See Exhibit L. As self-dealing transactions, these payments to insiders need to be entirely fair (both stemming from a fair process and resulting in a fair outcome). The burden of proof is on the Director Defendants to show that payments to these insiders are entirely fair, but since they run their business in a “Mafia Style” without written records, they will be unable to meet this burden.
  • The most egregious usurpation of a repurchase opportunity was committed by Daugette after the Lightfoot investigation and report. During the coronavirus chaos of 2020, Daugette personally bought shares from small shareholders for less than a quarter of tangible book value, while shortly thereafter he had LICOA pay three times as much for the Jacobs Shareholders' shares. If it was a good deal for LICOA to pay the Jacobs Shareholders $31.88 per LINSA share, then Daugette clearly usurped an even better opportunity from LICOA when he personally bought LINSA shares for prices as low as $10 per share – using LICOA resources such as employees, email accounts, and letterhead to conduct these personal purchases. After having his independent director patsies rubber-stamp his past misconduct with the Lightfoot straw-man investigation, he now feels emboldened to commit even more blatant abuses.

The entire Third Amended complaint is embedded below. The voluminous exhibits are in a second embed after that.

Licoa - Plaintiffs’ Third Amended Consolidated Complaint by Nate Tobik on Scribd

LICOA Third Complaint Exhibits by Nate Tobik on Scribd

New Order in LICOA Shareholders' Lawsuit

This order in Trondheim Capital Partners LP et al v. Life Insurance Company of Alabama et al in the US District Court for the Northern District of Alabama was published today:

This matter comes before the court on the parties’ Joint Status Report (doc. 52), which the court will construe as a motion by the plaintiffs for leave to file an amended complaint. For the reasons set forth below, the court will GRANT the motion and will grant the plaintiffs leave to file one final amended consolidated complaint.

In its prior Order (doc. 51), the court found that it erroneously abstained from hearing the Shareholders’ claim for judicial dissolution in light of the decision of the United States Court of Appeals for the Eleventh Circuit in Deal v. Tugalo Gas Co., --- F.3d ----, 2021 WL 1049813 (11th Cir. Mar. 19, 2021). The court ordered the parties to submit a Joint Status Report and to include proposals for moving forward in light of Deal.

In the Joint Status Report (doc. 52), the plaintiffs request leave to file “one final amended complaint asserting the derivative claims and reinstating the dissolution claim,” which in turn would “allow Defendants an opportunity to answer those claims or move to dismiss.” The plaintiffs also request to proceed with discovery while any motion filed by defendants remains pending. (Doc. 52 at 3).

The defendants request a briefing schedule to allow this court “to determine if it has jurisdiction to consider the dissolution claim[] before considering Plaintiffs’ remaining claims.” According to the defendants, “Deal concludes with the directive that the district court make…a determination of jurisdiction;” accordingly, they ask the court to follow that course here. (Doc. 52 at 3).

Although the defendants correctly point out that the Eleventh Circuit in Deal ordered the district court to decide on the merits “whether the governing state law permits a federal court to dissolve a state-chartered corporation,” plaintiffs’ claim for judicial dissolution is not currently pending before this court, because this court dismissed that claim without prejudice. Deal, --- F.3d at ----, 2021 WL 1049813 at *9; (doc. 50).

Accordingly, pursuant to Fed. R. Civ. P. 54(b), the court sua sponte WITHDRAWS its Memorandum Opinion (doc. 49, § III.B) and Order (doc. 50) ONLY as to its rulings to abstain from hearing and to dismiss Count Two of the Shareholders’ Direct Complaint—the claim for judicial dissolution—and to stay the case. The court LIFTS the stay pursuant to such withdrawal.

The court next construes the Shareholders’ proposal in the Joint Status Report (doc. 52 at 3) as a motion for leave to amend pursuant to Fed. R. Civ. P. 15(a)(2). Because the court previously dismissed Counts One, Two, and Three of the Direct Complaint and the entire Derivative Complaint without prejudice, and because Fed. R. Civ. P. 15(a)(2) requires the court to “freely give leave [to amend] when justice so requires,” the court will GRANT that motion and will grant the Shareholders leave to file one final amended, consolidated complaint containing the claim for judicial dissolution and any other claims—both derivative and direct—against all defendants. The Shareholders shall file their amended complaint on or by April 22, 2021.

This procedure will allow the defendants the opportunity to move to dismiss the claim for judicial dissolution in light of Deal’s directive, but will promote judicial economy by also allowing the court to consider at the same time any other matters in this case.

DONE and ORDERED this 7th day of April, 2021.

The LICOA Concerned Shareholders website has the documents that the Concerned Shareholders have received from books and records inspections of LICOA.

Interested in trying the Oddball Stocks Newsletter?

If you are curious about the Oddball Stocks Newsletter, we've added a couple low-risk ways that you can try out what we are about.

First, there are our back Issues. Our most recent Issue was Issue 34 this month. The following earlier Issues are available à la carte: Issues 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, and 31.

Last February, we compiled a collection of Highlights from our back catalog to demonstrate what the Newsletter is, or what it hopes to be: topical, philosophical, focused on companies that the market ignores, pounding the table for value investing while grappling with problems like rapacious managements that are consuming value.

The "Highlights Issue" is available here for purchase as a single Issue. If you have been curious about the Newsletter, then this is the perfect opportunity to try about two Issues worth of content (much of which is still topical and interesting) at a low cost.

This is a "highlight reel," but it is not a victory lap or a tout of what we have written about. A lot of these highlights are our think-pieces: on shareholder rights, on banking as a business model, on value investing. There are pieces about companies that got taken out at a premium but also about ones that are trading lower now some years later... of course, those may be the most interesting to pay attention to now. There are two companies – Scheid Vineyards and Enterprise Diversified (formerly known as Sitestar) – where we warned about significant risks that ended up materializing.

In the past, we also posted some Newsletter excerpts that give a taste of the Oddball writing and coverage style - but just remember that the most interesting content is for subscribers only. The excerpts were on The Coal Creek Company, Tower Properties, Bank of Utica, small banks, Avalon Holdings, Boston Sand and Gravel, Conrad Industries, and Sitestar / Enterprise Diversified.

Don't miss our recent Oddball Stocks blog posts (separate from the Newsletter content) on:
Finally, if you want to be completely immersed in the Oddball universe, be sure to follow Nate Tobik and the Newsletter on Twitter. 

Scheid Family Wines Announces Sale of Three Vineyard Properties ($SVIN)

Oddball grape farmer, vineyard, and wine producer Scheid Vineyards Inc. announced the following the night before Good Friday,
Salinas, California, April 2, 2021. Scheid Vineyards Inc. (dba Scheid Family Wines) (OTC Markets: SVIN) announced today that it sold three of its vineyard parcels for $33,000,000 in consideration, which includes the buyer assuming $20,000,000 of the Company’s debt that was secured by the properties. The disposition of these parcels, which comprise 1,193 acres of leased and owned vineyards, is part of Scheid Family Wines’ overall strategy to better align its asset holdings and debt with its growing premium bottled wine business.
Mr. Scott Scheid, President and CEO of the Company, stated, “We are pleased to complete this transaction and continue to focus our attention and resources on the growth of our branded goods portfolio, which includes our recently launched entrant in the trending ‘better for you’ category, Sunny with a Chance of Flowers, as well as other national and global brands.”

One of the bullish writeups that went around in 2018 thought that that Scheid's land should be worth $40k to $60k per acre. While this sale may not have been their best acreage (and location matters a lot in wine), this valuation still has to be a disappointment for Sum of the Parts investors in Scheid.

Left unsaid is what Scheid's ongoing relationship with this land and these grapes will be. Is this a sale-leaseback? Are they just going to buy the grapes? Is there any kind of long-term contract to buy them? 

Or, are they realizing that they don't need as many grapes because they can't sell that much wine?

Note that Scheid also had to sell land in 2000 to deleverage.

Previously regarding Scheid:

We have also covered Scheid in past Issues of the Oddball Stocks Newsletter.

Just Published: Issue 34 of the Oddball Stocks Newsletter!

We just published Issue 34 of the Oddball Stocks Newsletter. If you are a subscriber, it should be in your inbox right now. If not, you can sign up right here.

Remember that we have made some back Issues of the Newsletter available à la carte, so you can try those before you sign up for a subscription: Issues 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, and 31.

We also published a Highlights Issue in February 2020. The Highlights Issue is available here for purchase as a single Issue.

We just lowered the price of most of our back Issues to $99 from $139. If you are curious about them, there has never been a better chance to try them.

If you have been curious about the Newsletter, the Highlights Issue is the perfect opportunity to try about two Issues worth of content (much of which is still topical and interesting) at a low cost.

Life Insurance Company of Alabama ($LINS $LINSA)

A new ruling in the Life Insurance Company of Alabama minority shareholder litigation:

LICOA Abstention Order by Nate Tobik

And an update at the Concerned Shareholders of Life Insurance Company of Alabama (LICOA) website:
UPDATE: All of the documents that the Concerned Shareholders have received from books and records inspections of LICOA are available now at this link. We believe that minority shareholders of LICOA should work together to "follow the money" and figure out the best path forward for the company so that shareholders can earn an attractive return on their capital invested.

UPDATE: A new ruling in the litigation in Federal Court in Alabama: "ORDER re the court's December 8, 2020 Memorandum Opinion (doc. 49) and Order (doc. 50), where it would abstain from adjudicating Count II of the plaintiff Shareholders' Direct Complaint (doc. 25). Accordingly, this court concludes that it erroneously decided to abstain from adjudicating the Shareholders' claim for judicial dissolution of LICOA. To that end, the court ORDERS the parties to submit a Joint Status Report to the court on or by Wednesday, April 7, 2021, informing the court of the current status of this litigation and a proposal for moving forward in light of the Eleventh Circuit's decision in Deal. Signed by Judge Karon O Bowdre on 3/23/2021."
Previously, regarding Life Insurance Company of Alabama

An Old Oddball Stocks Idea Has Its Day - Sale of Sunnyside Bancorp, Inc. ($SNNY)

Back in August 2014, Nate wrote a post, "Sunnyside bank, severely undervalued on the cusp of a turnaround,"

I have a portion of my portfolio set aside specifically for cheap bank stocks.  In the terms of some value investors my dedicated cheap bank portfolio might be considered a 'basket'.  That is I buy tiny stakes in many banks if they meet certain criteria.  I purchase larger positions in banks outside of this basket, but inside of it most positions are roughly the same size, about a quarter of a percent.  No single bank is going to make or break the portfolio, but as a group I have a large exposure to undervalued banks. Sunnyside Bancorp (SNNY) is one of these banks.

Sunnyside Federal is a savings and loan that was established in 1930.  The bank is located in Westchester County about 25 miles north of New York City.  The bank's headquarters and only branch is located on Main Street of the quaint Irvington a few blocks from the Hudson River.  They're also located near a number of country clubs, which should tell you something about the area they're located in.  Westchester is the second wealthiest county in the State of New York with median home values of $533k and median household income of $81k.

The bank started as a mutual meaning the depositors owned the bank.  The bank felt constrained by their mutual structure and in 2013 conducted an IPO.  The IPO raised $7.9m with the sale of 793,500 shares at $10 per share.  Depositors are given the first opportunity to purchase shares and with the completion of the IPO the shares now trade on the secondary market.  The IPO proceeds plus their capital prior to the IPO gives them an equity value of ~$12m or $15.12 a share.  Given that shares most recently traded at $9.45 this is an attractive stock at 63% of book value.

The bank's conversion from a mutual to a stock company was in an effort to pursue growth.  The bank is as safe as they come with a 35% Tier 1 capital ratio and 13.7% Core capital ratio.  They have a very small amount of non-performing assets, and OREO.  Some small banks trade for less than book value because they have an asset quality problem, Sunnyside does not.  Sunnyside has a growth problem.

We just saw a press release from last night: DLP Bancshares Inc., an affiliate of DLP Real Estate Capital, to Acquire Sunnyside Bancorp, Inc. Under the terms of the acquisition agreement, shareholders of Sunnyside Bancorp are supposed to receive $15.55 in cash per share. From the time when Nate wrote about it, shareholders will have earned an IRR of around 8% compounded if the sale happens for $15.55 per share. Tangible book value was $14.99 per share as of September 30, 2020. 

Sunnyside is and has been an overcapitalized (27.5% Tier 1), unprofitable former mutual bank (i.e. a conversion). Note that the idea got a little bit of flak in the comments:

  • Are you concerned with the declining deposit base?
  • As a customer of this bank and many other banks- I find NOTHING going for this bank that deserve mention EXC EPT your figures that a buyout from another bank can make sense. WHile you glossed over the fact that this bank had to go from MUTUIAL to Stock mainly because it was losing money the fact that stockholders now have to make that up instead of its customers is no solace. Holding this banks stock for some kind of buyout may be not a reason to buy the shares as long as the bank itself has at its core a very limited banking services and simply poor business practice.

Sunny side is an impressive case of how well a poor quality business can do if bought at the right price. For seven years, book value has remained the same ($15) - meaning the occasional profitable years were offset by subsequent losses. The bank did not pay a dividend or buy back stock, either.

Owning it would have been like watching paint dry, or even worse. The only thing it had going for it as an investment was valuation - 63% of tangible book when Nate bought. Every year you would have been tempted to sell it because nothing was happening. There was no story to tell about progress or improvement. 

Lyall Taylor has some very important posts about how value investing works, and will continue to work, because of psychological barriers and institutional (principal-agent conflict) barriers to implementing it:

The fundamental issue underlying all these factors, I believe, is the nature of the payoff patterns deep value stocks typically exhibit, and why. A typical value stock has well-understood and well-publicised problems/issues/risks, and the majority of the time, for individual issues, these well-understood issues do result in subsequently lackluster investment outcomes (usually in the form of protracted periods of stagnant performance that lag go-go market favourates). [...]

[I]t is not just a principal-agency issue - this non-linear payoff profile is also psychologically very difficult for the investment practitioner/analyst themselves, because investing in/recommending such stocks requires one to endure a continuous stream of negative reinforcement most of the time, of which our human psychies are not well adapted to withstand. Indeed, academic research shows that most people's ability to remain rational breaks down in an environment of constant negative reinforcement. Day after day, month after month, and even year after year, the market, friends, associates, the media, and clients are telling you you are wrong and are a fool, and most of the time that judgement will seem vindicated by subsequent outcomes. [...]

 Many so-called 'value' investors fall into this trap. Most value investors these days do a lot of things that are actually the antithesis of true value investing as described above: they focus on buying good businesses with good outlooks trading at 'reasonable' valuations (read full/high but not absurd multiples), and they invest in concentrated portfolios. This is the antithesis of exploiting the market's tendency to overprice the best businesses with the best outlooks and underprice the worst businesses with the worst outlooks; and it focuses - just like the market - only on the base-case, most-likely outcome, and generally ignores tail risks. And yet it is changes of opinion, driven by unexpected events, which drives the vast majority of the big moves (and returns/losses) in markets. The fundamental issue underlying this dynamic is that investors systematically overestimate their ability to predict the future, and are therefore prone to overconfidence and excessive extrapolation. [...]

The truth is that there is no statistical evidence that high quality stocks - however they are measured - systematically outperform. In fact, there is evidence to the contrary, and it makes sense why: investors overestimate their ability to predict future growth and business quality, and underestimate the capacity for change. Consequently, investors systematically overpay for growth and quality. The problem is that when aspirant 'value' investors come to implement the philosophy, they notice that all the cheap businesses have problems of one type of another, and so avoid them. They end up seeking quality instead of value, and forget that you are rewarded in markets not for identifying and owning good companies, but instead for identifying and exploiting mispricings. It turns out markets are 'too efficient' at pricing in growth and quality - it is too well recognised so they overpay for it.  

Why are they finally selling? The board and officers only owned 6.5% of the company. The bank is in Irvington, NY (up the Hudson) and the top three execs were making $570k combined. The CEO turned 66 this year, maybe that was why?

Update on Enloe State Bank

We posted about the failure of Enloe State Bank in Texas a couple years ago. Here is the update:

@MidwestHedgie Tweetstorm on Bank of Utica $BKUT $BKUTK

 You saw our post last week about the Bank of Utica 2020 Annual Report. On Twitter, @MidwestHedgie

The Ohio Art Company - Reverse Split (Squeeze Out) $OART

Ohio Art (OART) sent out a notice regarding a 1:2,300 reverse split (squeese out) that will cash out smaller shareholders at $10.05. The announcement says that controlling shareholders (the Killgallon family) control enough stock to push it through. 

The announcement does not have 2020 financial statements, and OART reports only annually. Given the lack of disclosure and the price where the stock was trading prior to the announcement, we consider this split potentially abusive.

One investor reaction on Twitter:

Ohio Art Reverse Split Notice of Meeting by Nate Tobik on Scribd

Fidelity D & D Bancorp, Inc. $FDBC to Acquire Landmark Bancorp, Inc. $LDKB

A tiny bank acquisition in Pennsylvania announced on Friday:
Based on the financial results as of December 31, 2020, the combined company would have pro forma total assets of approximately $2.05 billion, total deposits of approximately $1.8 billion, and loans of approximately $1.4 billion.

Once the merger is complete, Fidelity will have 25 retail community banking offices in Northeast and Eastern Pennsylvania, offering a complete range of consumer and business products, including wealth management. Its Customer Care Center is open 7 days a week for the convenience of its clients. Additionally, Fidelity Bank offers the ability for its clients to apply for consumer deposits, real estate loans, and personal loans through its robust online application processes.

Landmark shareholders will receive 0.272 shares of Fidelity common stock and $3.26 in cash for each share of Landmark common stock that they own as of the closing date.

Based on Fidelity’s 10-day average closing price at February 25, 2021 of $55.00, the transaction is valued at $43.4 million or $18.22 per share. The transaction is intended to qualify as a tax-free reorganization for federal income tax purposes.

As of December 31, 2020, Landmark had total assets of $354 million, total deposits of $287 million and total loans of $280 million.

Acquirer FDBC is paying mostly stock with some cash, valued at $42 million with acquirer stock down 6% on Friday. That is 1.17x the year-end 2020 book value of target LDKB, which earned 4% on equity last year and had assets of $354 million. 

Both banks are in the Scranton area.

Target stock was offered on Friday at a 1.7% deal spread.

Small Banks Hold Better Credits Than Regional Banks, And They're Cheaper

I think it’s safe to say that most value investors believe the market is overvalued.  But that doesn’t mean stocks can’t appreciate like crazy…hence the Gamestop situation.  The question is what do those do, those who look to buy things at a discount?

I’ve watched the stock market madness with intensity.  I HATE to overpay for anything, from something cheap to something expensive.  I’m always hunting for a bargain.  The problem is no one is bargain hunting anymore.  It’s a first in wins market.

We have some friends who are in their early 20’s and who recently purchased houses.  They explained that they’d get an email alert when a house listed, and within a few hours there’d be dozens of offers on the house.  They had to view and pick the place they’d live for the next decade in an hour.  This is absolute madness.

When my wife and I looked at houses (circa – 2015) we’d look at a place, ponder, look again, ponder, look again and then make a decision.  It always seemed strange to me that you could walk through a house and within an hour decide that you’d want to live there for decades after a simple walkthrough.

People who are looking now have no advantage of time, they’re rushed by the market to make a decision, any decision as quick as possible.

When I think about this it seems like it isn’t conducive to good outcomes.  Imagine having to decide on a spouse on the first date, or a job based on how the building looks from the parking lot.  There isn’t enough time to determine what the other side is like.

The thing is everything is rushed now.  Stocks, houses, spouses, everything.  If you can’t make a snap decision you’ve messed up!

Can you imagine what our ancestors would have thought of this?  Someone who spent months walking between cities, or years working as an apprentice.  They’d think we are crazy and stupid.  Yet that’s where we’re at!

A good friend of mine will send me pictures of sales as they’re happening.  He’ll shoot me an iMessage image of a beer that’s one sale, or some other crazy deal with a message like “wow, can you believe the price?”  I always chide him that when you see a bargain that’s the time to purchase.  He misses most of these thinking that the deal will remain forever.  When I see a bargain I jump on it right away because I know that bargains are situational.  Something that is cheap now probably won’t be cheap in a week or month.

The corollary to this are Oddball stocks that have been cheap for weeks and months and years.  Investors are losing patience and are giving up.

What does this mean?

A year ago I started to get calls and emails that investors were dumping their Hanover Foods shares.  Eventually I realized there were no investors left standing in this stock.  I thought that if everyone gave up it would be some sort of sign shares would start to appreciate.  Instead nothing happened.  Maybe they will eventually, but it hasn’t happened yet!

I think that’s similar to a lot of these stocks.  We purchase some dowdy share and think “since no one else is buying it’ll pop quickly.”  Nope, they wallow at a low valuation until suddenly one day they pop.

The thing is most stocks don’t pop if their business never changes from something terrible to something mediocre.

As we’ve talked to banks at we’ve realized something significant.  Headline stories on business don’t tell the whole story.

There are banks that are deposit constrained and want to lend more, but most banks are lending constrained and want to lend but don’t know who to lend to.

These banks are looking for solid owner occupied credits that aren’t likely to default.  The problem is these credits are few and far between.

Anyone looking to purchase a vacant office building?  The market is flooded with those!

Let’s talk offices for a minute.  I know remote working is the rage right now, and it has to be.  But is this trend something that’s going to continue?  I don’t know, although workers are largely stating their opinion that they want it to continue.

One of my younger brothers works in healthcare, and his company put out an anonymous survey asking who’d like to work from home full time, part time, or from the office full time.  He said 70% of survey recipients wanted to work from home full time, with 25% part time and 5% full time.  The company listened and decided that they’d adjust their policies.  It had worked well enough in 2020 and 2021, so why not?

This is an enormous office space lessee in Northern Ohio.  What does this mean for the market?  It means that most companies are going to be reducing office space.  Maybe not dumping the office entirely, but some portion of it.

The people who need to worry are landlords and banks who bet heavily on white collar workers.  The majority note holders of this asset class are regional banks.  It isn’t a small community bank that owns a note on a $250m office building, it’s the name brand regional bank that owns the note.

If companies reduce their office space by 20-30% this is going to create a significant issue for regional commercial banks that own notes on these buildings.  Who is going to purchase this office space?  Will it be the upstart tech companies that are remote only?  If it’s not them then who?  There isn’t a natural buyer, and hence prices could drop through the floor.

As we’ve talked to local banks they are interested in owner occupied commercial real estate, but nothing office related (unless it’s a doctor or dentist).

If we extrapolate that out it’s a depressing print for regional banks and downtown office buildings, but not that awful for smaller banks that have avoided those buildings simply by size.

What’s crazy is the market is penalizing these small banks as if they’re dead.  Most are not, and many are thriving!  The problem is the larger banks exposed to the latest COVID trends are dragging down the smallest banks.

This presents an awesome opportunity for investors to investors who are interested in picking up shares in cheap banks that are still relatively safe.

It’s my view that sitting patiently and waiting for deals is much better than being sucked up in whatever mania is present at the moment.  Patience always wins the day!

Just Published: Issue 33 of the Oddball Stocks Newsletter!

We just published Issue 33 of the Oddball Stocks Newsletter. If you are a subscriber, it should be in your inbox right now. If not, you can sign up right here.

Remember that we have made some back Issues of the Newsletter available à la carte, so you can try those before you sign up for a subscription: Issues 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, and 31.

We also published a Highlights Issue in February. The Highlights Issue is available here for purchase as a single Issue.

We just lowered the price of most of our back Issues to $99 from $139. If you are curious about them, there has never been a better chance to try them.

If you have been curious about the Newsletter, the Highlights Issue is the perfect opportunity to try about two Issues worth of content (much of which is still topical and interesting) at a low cost.