One thing that many novice investors do is to jump into the stock market whole hog. Our view is that this is a poor practice; it is better to move into stocks gradually, toe by toe, as one assembles a portfolio.
This methodology, with patience at its core, is difficult to execute in an age where advertisements bombard the senses, not only through electronic media, but also through more traditional means. Regardless of the conduit, much of it is not worth the paper —or electrons —it is written on.
Building a portfolio is akin to constructing a house: it is simply not possible to wave a wand and have the structure magically appear. It must be erected brick by brick. It often takes longer than anticipated, but by taking extra time, the odds increase that one will get it right.
One stock that could enhance many portfolios is the latest Contra acquisition, First United Bank. This Oakland, Maryland–based regional bank was founded way back in 1900. While it has grown since then, it remains rather diminutive, with a mere 27 locations and 29 ATMs.
But while many banks have disappeared into history, this corporation has managed to survive the bad times of the past century. That does not mean it didn’t suffer. During the recent nasty recession, FUNC went into survival mode and had to be aided by the TARP program.
While many banks changed management during that tortuous time, First United has pretty much the same old top brass. That appears to have worked out, as the enterprise is now free of the TARP strings and is profitable. Accomplishing this certainly meant some distasteful decisions, including eliminating the quarterly dividend of 19.5 cents. But that was a necessity, given that the bank lost more than $11 million in 2009, followed by $10.2 million in 2010.
Sharpening its focus appeared to be the bank’s best option, and revenues that approached $75 million in 2009 will likely be closer to $60 million this year. That, however, has created a positive bottom line, continuing the pattern than was commenced in 2011, when $3.6 million was earned, increasing to $6.4 million last year.
One thing the bank did not do (making it far more attractive to investors) was sell more shares to raise capital, a common practice in the industry. The number of shares outstanding (six million) remains the same as prior to the recession. The low number means that it should be easier to re-establish a dividend, which we suspect will happen in the next couple of years.
FUNC has some other eye-catching features. It currently trades at under $9.00, well below the book value of $12.54, with no goodwill on the balance sheet. This statement is mighty classy, featuring zero long-term debt.
Management owns just south of six percent, so is reasonably vested, and one insider bought last month. Countering the positives somewhat is that cash flow was negative last quarter, although there is a reasonable expectation that this was an aberration.
Being a relative minnow in a world of sharks, it is possible that a larger player could find First United worth consuming. While that is speculation, this company could prove a lovely addition for some of the bigger players in the sector, many of whom are recovering from the recession and looking for acquisition opportunities.
There are also a number of other banks of various bulk that grace our two portfolios. These include Bank of America, Bank of Commerce Holdings, Fidelity Southern and Sun Bancorp. Worth noting is that there are no Canadian banks; while they are paying lovely dividends, additional capital appreciation will likely be more muted than with their American cousins, which were beaten up more during the recession and generally have not recovered as well.