Gettin’ jiggy with Bank of Ireland

Benj Gallander and Ben Stadelmann
Monday, September 28, 2009

Recently, we talked about
“playing with fire” in the financial sector and how one of us chose to load up his portfolio with financials at a time when most investors were shying away. Now, we have a partial verdict on a couple more of those plays.

Purchased at $4.66 (US) as New Year celebrations were gearing up, Bank of Ireland then went into a swan dive. As the financial sector appeared to be heading into a cataclysmic vortex that would last for years, the position was sold a few weeks later at $2.24. Taking worse than a 50 percent haircut in no time at all is not fun and definitely damages the ego. Naturally, it also leads to a reassessment of risk-reward perceptions.

During the go-go days of the mid-2000s, the Irish economy proved to be one of the most successful in the world — perhaps not China-esque, but absolutely brilliant in adapting to the new world of technology. It even earned the sobriquet “Irish Tiger.”

Lots of companies had been enticed to move to the Emerald Isle, and people’s standard of living dramatically improved as unemployment dropped. Ireland had moved from not quite have-not status to very, very hot. That included the real estate market, just one area of the economy where speculation was rampant.

The good times would not endure. As the global financial situation toppled, overleveraged Ireland was facing the reality of ending up in the same quagmire as Iceland. The three major banks were all imploding and nationalization was on the agenda. Stockholders, or those looking to acquire shares, had to wonder if there would be any money left at the end of the day.

After considerable head-banging, and waiting for 30 days to elapse so that the tax loss would crystallize, shares of Bank of Ireland were reacquired at $1.66. There is no debate that this was a highly questionable, perhaps stupid move. But the sight of a stock that had routinely traded above $60 being offered for less than two dollars was mighty tempting.

In addition, knowing that it was not just this bank being hit in what was the greatest stock rout in more than 75 years, it seemed logical to conjecture that, once the global economy turned around, this one might also. Of course, the very real risk was bankruptcy. But the reward potential was so outsized relative to the risk that the play seemed reasonable.

Ultimately, it has proven better. When the stock hit $16.60 last week, a 10-bagger, 53 percent of the position was sold. That decision seemed a tad unfortunate when, two days later, the stock passed $20 — oh, if only the sale had been postponed for a few days — but that is the nature of the investing beast. The 47 percent remaining on the table will likely rest until the stock hits, at minimum, $45, or until the situation transforms and it is deemed time to dump.

Though the term “10-bagger” is thrown around as though they are common, the fact is that they are very rare. Normally, they take years to develop, and having one — actually buying and then selling a position, rather than just seeing it as a paper play or in hindsight — is truly unusual. Achieving one in a period of less than seven months is a genuine rarity. But, as investors know from the old axiom, the time to buy and pull off huge returns is when the blood is running in the street.

Part of the reason the Bank of Ireland play was made rests in an ability to cut through the noise. Today’s world has more information flowing at us from more directions and diverse sources than ever before. Many of these harp on the negative, because that is what sells news. As investors, we are doing our best to tune out to some degree, which is indeed a difficult thing to do.

One other company mentioned in the a previous article, Irwin Financial, was issued a “cease and desist” order last week by regulators, often a precursor to a bank’s demise. When this notification came through, the shares were hastily dumped at 58 cents per share, down markedly from the 81 cent purchase price in June. Two subsidiaries were then closed by regulators.

First Financial Bancorp has assumed the deposits. The stock had stopped trading, but has resumed on an over-the-counter basis and is currently changing hands at around 7 cents a share. Though a haircut of almost 30 percent, a multitude of these can be sustained before the major gain from the Bank of Ireland sale is offset.

Quite simply, it is not often that 10-baggers are achieved. When they are, especially in a condensed time frame, one should rejoice, butter up the lobster, uncork a favourite beverage and celebrate. Major investing successes should be savoured.