Small regional banks.....

Times of distress usually yield good opportunities as even good companies fall prey to negative sentiment and trade at attractive levels. I thought it would be useful and interesting to being tracking a number of bank stocks, since they could become strong buy candidates over the next few months, similar to the opportunity presented by S&L's in the late 80's/early 90's. The general drop in the financial sector has led to significantly higher dividend yields, for example M&I yields almost 6%.

• Astoria Financial (AF)
• AmericanWest Bancorporation (AWBC)
• BB&T (BBT)
• Bank of Marin Bancorp (BMRC)
• Colonial Bancgroup (CNB)
• Century Bancorp (CNBKA)
• Evans Bancorp (EVBN)
• East West Bancorp (EWBC)
• First Horizon National (FHN)
• Farmers & Merchants Bank of Long Beach (FMBL.OB)
• Green Bankshares (GRNB)
• Hanmi Financial (HAFC)
• Hudson City Bancorp (HCBK)
• Investors Bancorp (ISBC)
• Lincoln Bancorp (LNCB)
• M&I Corporation (MI)
• Malaga Financial (MLGF.OB)
• People's United Financial (PBCT)
• Provident Bankshares (PBKS)
• Pulaski Financial (PULB)
• Sovereign Bancorp (SOV)
• Severn Bancorp (SVBI)
• West Coast Bancorp (WCBO)
• Wintrust Financial (WTFC)
  

Enterra Energy Trust (ENT)

An interesting special situation is a Canadian royalty trust, Enterra (ENT). It has sold off from over $20 a few years to around $1 earlier this year but has rallied sharply recently to $4.50. Previous management with conflicts of interest has been replaced, and assets sold to pay down debt. Remaining debt is expected to be restructured by 2Q/2008, with possible resumption of dividends by year end. 1Q report was very good with FFO up over 30%, and 2Q should be even better, given the rally in energy prices.

Book value is around $3.75, with most Canroys trading a 2-3x book ENT could trade at around $7-$10 by year end.

Wesco 2008 annual meeting

My wife and I began attending Charlie Munger's Wesco annual meeting last year, since I have relatives living in the area and since we were such big fans of Buffett's Berkshire Hathaway annual meetings. It's held in Pasadena, at the Pasadena Center, in a tent holding around 1000 attendees. The venue is similar, with microphones setup to allow anyone in the audience to ask a question. Munger kicked off the meeting with his own comments, which lasted about an hour. The session usually runs a few hours, from 2-5PM.


Below is a summary of some of Charlie's opening comments and answers:

• Berkshire Hathaway working model - Munger talked at length about how well Berkshire's version of the conglomerate model works so well and how no one else has been able to duplicate it. He reminded us that Berkshire only has 19 people in headquarters, and that the 'provinces' were kept happy without any envy or without retaliation against HQ. He mentioned GE as a company that also works well, but with much more central control and overhead.
• Derivatives - Munger definitely felt the use of derivatives was unnecessary, dangerous, and out of control. He felt the accounting industry was lax as well as the regulatory authorities. He thinks there will be a 'huge mess' and that the unwinding process will be very difficult.
• Investing returns - Munger thought it was amazing, 'hog heaven' as he phrased it, that returns had been so strong the last 25 years, especially with hedge funds/private equity, but did not feel it was sustainable, and thinks expected returns of around 4-5% are more likely.
• Management - He thought management at many financial firms had a tendency to follow the crowd and took unnecessary risks.
• Executive Compensation - Munger has felt for several years that executive compensation was excessive, and that executives should purposefully not fight for every last dollar.
• Berkshire Hathaway Earnings - Whitney Tilson got up to remark that at Berkshire's annual meeting how no one asked about the first quarter earnings, which had just been released the day before. Munger remarked that this was an example of the bond shareholders had with management, then went on to make some remarks about Berkshire's business.

Berkshire Hathaway 2008 annual meeting

This year's meeting had over 31,000 attendees, up from around 28,000 last year. The current site is essentially at capacity, and Buffett has hinted at other plans for next year, including the use of two sites.....

Each meeting begins with a humorous movie with a certain theme, this year's spoofed the primary campaigns, with Munger running for President. It also highlighted Buffett's interest in soap operas, with a guest appearance by Susan Lucci, as the supposed new CEO of Berkshire, with Buffett trading places with a new career on her soap. Past years have included appearances by Tiger Woods, Lebron James, and Arnold Schwarzenegger.

As usual, questions and topics were wider-ranging, since anyone can go to one of several microphones and everything is done live.

Some of the highlights include:

• Muni Bond Unit - Disclosure about the new bond insurance unit, Berkshire Hathaway Assurance, which in the first quarter wrote $400 million in premiums, very significant considering it's the first quarter of operation. Of interest was the fact that most of the deals already had insurance, from one of the existing players...a clear sign of lack of confidence in these supposedly AAA-rated entities. This is an excellent example of some of the opportunities Buffett is able to take advantage of.
• Credit Market Problems - Another example of how Buffett was able to take advantage of the recent turmoil was the auction-rate securities market. These are debt securities (often munis) whose rates are set weekly, at auction, with high penalty rates if there are no bidders. Berkshire accumulated as much as $4 billion worth at rates as high as 11%. He noted that the same security was priced at widely varying rates from week to week and that this reflected market inefficiencies, in contrast to the 'efficient market' hypotheses widely taught in business schools for over 25 years.
• Financial Markets - Several comments were made about all the problems in the financial markets earlier this year. Buffett and Munger agreed that Bear Stearns had to be saved, but were critical of the 'gestalt' of Wall Street, encompassing greed, overleverage, aggressive accounting, and poor risk management.
• Future returns - Buffett and Munger suggested investors not expect returns as high as seen in the past, confirming other comments made by them. They didn't give any specific numbers but somewhere in the range of 8-9% is likely.
• Other - Numerous other questions were answered, which contributed to the overall atmosphere....just to be present while Buffett and Munger shared their knowledge was such a privilege. These questions covered subjects such as whether Berkshire would consider buying the Chicago Cubs, how to grow oneself personally, recommended readings (Influence and Yes! by Cialdini)