Why Investors Are Wrong to Short Bofl Holding
Shares of BofI Holding (BOFI) are currently trading at multi-year lows after a period that saw them plunge from a high of $36 to about $17 per share. The company's stock is currently experiencing a short ratio to float of more than 40%, while recent insider transactions indicate increased activity from buyers.
Why is the company experiencing such a high short ratio when insiders are actually buying? Someone must be getting things really wrong. Let's examine.
Warning! GuruFocus has detected 3 Warning Signs with BOFI. Click here to check it out.
The intrinsic value of BOFI
BofI Holding is a holding company for an internet banking products and services provider, BofI Federal Bank. The company was established in 1999 to provide expedited banking services to consumers and businesses in the U.S.
Some of the most notable products and services provided by the company include consumer and business deposit accounts, checking, demand and savings, as well as time deposit accounts. The company also operates a loan portfolio that includes products targeting mortgage clients, commercial real estate, prime loans for purchase of used and new automobiles and recreational vehicles, among others.
BofI Federal Bank is the company behind Bank of Internet, whose services are described in the write-up above. This is an interesting marketplace that is still very much at its early stages. Customers, businesses and multi-national corporations are beginning to embrace the aspect of internet banking. Even traditional banking institutions have introduced their own internet banking services. This suggests that in terms of opportunity, BofI is in the right mix of things.
Over the last four months, however, the company's stock has plummeted due to accusations that the larger part of the investment community believes are baseless.
Why the shorts?
As noted, shares of BOFI have plunged in the last four months with shorts adding pressure. BOFI's short interest of more than 40% is based on legal suits the company is facing from various parties.
Those accusations are mostly directed against the board of directors, citing possible breaches of fiduciary duties. ost of these accusations have already been proven false and baseless, while the remaining ones cannot really point to a particular evidence for credibility. Yet, shorts continue to pile pressure on shares of BOFI.
It is common knowledge that when such accusations hit the media, it is pretty hard to just wish them away. It will take some time before the dust clears.
Some of the latest accusations include this one, "Lifshitz & Miller announces an investigation into possible breaches of fiduciary duties by the BOFI board," and this one, "Gainey McKenna & Egleston announces that an action has been filed against the officers and directors of BofI Holding, Inc."
Shorts have taken advantage of these lawsuits to send negative messages to the investing public about the stock. Still, from a fundamental perspective, BOFI is one of the best financial stocks in the market right now.
This is primarily because of the growth story that is well-mirrored in the company's business model. BOFI is an internet-based financial services company involved in deposits and lending. It is not the only company to pursue this hot industry that has attracted several other companies across the world.
Look at PayPal (PYPL) for example; it is 100% online based, but with a very interesting business model in the financial services industry. Its primary business is payment services. There are other smaller players, like eLogbookloan, which specializes in issuing logbook loans online to clients.
We also have several others specializing on payday loans and other soft credit solutions. These are products that are tailor-made for a particular business segment in the middle-low class economy. This class is also the most dominant and the most rapidly growing across the globe.
The rapid growth of the internet banking industry has triggered the rise of several spin-off online financial services, and these are shaping how we do everything from shopping, sending money, and now typically, banking and lending.
BOFI is at the center of everything, almost literally. After examining the series of services offered by the company's operating business Bank of Internet via BofI Federal Bank, BOFI is clearly a growth stock with an interesting value proposition.
BOFI appears to be cheaply priced when compared to industry averages on a majority of the valuation multiples that can be used to assess its valuation. For instance, the stock currently trades at a P/E ratio of 12.34x compared to the industry average of about 15.90x.
When we factor in growth potential, the stock becomes even cheaper with a PEG ratio of about 0.97x, which compares to the industry average of about 2.36x. This justifies the company as more of a growth stock rather than a deep value stock.
The growth proposition is well-backed by the company's small size in a rapidly growing marketplace in which it appears to be well positioned to benefit in the next few years.
Conclusion
Shares of BOFI traded at $36 per share just four months ago. The only adverse thing that has come in the company's way since then is a series of lawsuits, which as pointed out are most likely to be proven baseless.
As such, the sooner the investment community and in particular, the shorts, realize that BOFI's value proposition is impeccable, the sooner the stock will begin to rise again. But once it gets going, it could take a matter of weeks to get it to where it was a couple of months ago.
The shorts are terribly wrong about BOFI. It is clearly a super bargain stock at this moment. It has a 4.5-star rating on its business profitability rank at GuruFocus, while most analysts have a consensus overweight rating.
Disclosure: I have no position in any stocks mentioned.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Signs with BOFI. Click here to check it out.
The intrinsic value of BOFI
