47. Yawn
641 words (3-minute read)
Ames National Corp (ATLO) held their annual meeting this week.
ATLO is a small bank holding company in Iowa (that I’ve written about before). I became interested in (and a shareholder of) the company last year because their financials looked solid. At the time, ATLO had a $201M book value and was trading at $182M ($20.02 per share), with positive earnings. Their balance sheet appeared able to withstand the heightened risks introduced during the pandemic (e.g. bad loans, unemployment, investment losses).
On Friday, their stock closed at $25.28 (a market cap of $230M)—26% higher than when we last discussed the company. Of course, it feels like every company in the country has been up astronomically all year, so 26% in 6 months might seem almost unimpressive. But 26% in 6 months is still 26% in 6 months. In addition, many hot stocks have actually struggled over the same time period, and ATLO’s 26% increase is very different than (insert quintessential growth stock)’s 26% increase.
Why?
It’s backed by sustainable earnings.
ATLO CEO John Nelson said some interesting things at the annual meeting (which 81 people attended virtually). He made two important points about the company’s stock price:
When asked about the prospects of ATLO’s stock price, he gave the answer a CEO should give: They focus on fundamentals (earnings) and hope that the stock price follows. He acknowledged that ATLO’s longer-term stock price performance has been uninspiring (partially attributed to the fact that bank stocks have been out of favor). But he believes that if management continues to grow earnings, the stock price will follow. (I agree.)
Historically speaking, their “stock is a bargain.” Thus, repurchasing shares is an attractive use of capital (they bought back 100,000 shares in 2020). The stock is trading at ~11x earnings and ~1.2x tangible book value—cheap. For the same reason share repurchases are attractive, issuing new shares is currently unattractive. They would look for higher multiples (e.g. ~15x P/E and 1.5-1.6x P/B) for equity issuance to become a better option.
ATLO posted record earnings ($18.9M) in 2020 despite a $4.4M increase in loan loss provisions (which many banks overshot, causing credit reserve releases). If the stock price actually does follow earnings, ATLO’s in good shape.
Nelson shared some other thoughts & info.
Harrison Barnes, “NBA player and philanthropist,” joined the Board of Directors of First National Bank (one of ATLO’s subsidiaries) in August 2020. He also became a “meaningful shareholder.” Barnes was born in Ames, Iowa and wants to “help preserve and grow this hometown treasure.”
Nelson finds it hard to agree with the Fed’s stance on inflation. His opinion is simple: when you increase the money supply by $3 trillion, inflation is probably not so transitory.
Corn prices have helped the company—corn has gone from about $3/bushel to nearly $7/bushel over the past year. 21% of ATLO’s loan portfolio is tied to agricultural real estate. Farmers benefit from higher corn prices, which means they are more likely to pay off their loans. Therefore, ATLO has been able to decrease the scope of its agricultural portfolio “watchlist” (i.e. loans that may not be repaid)—thanks to rising corn prices.
Nelson is hoping federal stimulus slows down so ATLO can keep up. Banks have to maintain a certain capital ratio (i.e. equity as a percentage of total assets). Stimulus increases bank assets (to the tune of $300M for ATLO in 2020) without increasing equity, thereby decreasing the company’s capital ratio. That’s tough for the bank to keep up with over time.
Sometimes good investments are boring.
Banks have been out of favor—hotter investments have stolen the spotlight.
SPACs, NFTs, cryptocurrencies, and tech stocks are fun.
ATLO is boring.
But it still looks good at 1.2x P/B.
DISCLOSURE: I own ATLO stock.
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I’d love to hear your thoughts and stories. If you have anything to share, or if there are any topics you’d like to hear more about, please email me at tucker@prevailingwinds.co.
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