Today's market confronts multiple macro pressures: a euro debt crisis, a feeble global economy and social unrest in many parts of the world. But as a value investor, I believe contrarianism works. I'm often buying what others are selling and selling what others are buying. Going against the craven herd is the only way to get good prices. When the macro picture appears grim, bargains abound. As Baron Rothschild famously said, "The time to buy is when there's blood in the streets."
In the spirit of bloodletting, let's look at the Trefis model for Bank of New York (BK). Full disclosure: I own BK in accounts and funds I manage - and I'm also an investor in Trefis. I've just profiled BK in the inaugural issue of The Berman Value Folio (of which this post is a revised excerpt), a brand new Forbes interactive investment report using Trefis tools.
BK is not the cheapest choice according to Trefis, but with a Trefis price of $26.86, 35% above its $19.92 market price, BK is still undervalued.
BK is a custodian bank - a bank that specializes in holding other people's money in the form of vast pools such as mutual funds, hedge funds, ETF's, and ADR's. Founded by Alexander Hamilton in 1784, BK has muddled through recessions, depressions and wars. It has many elements of a great business: dependable recurring fee revenue and supersized economies of scale. Unlike a commoditized airline, bank custodians distinguish themselves by brand and balance sheet strength.
With relatively modest financial leverage and the highest debt ratings among large U.S. banks, BK is less a traditional lending institution than a transaction processor. It collects a toll for servicing accounts, managing assets, and everything in between. Scale is essential for BK where servicing assets amounts to rolling up billions of nickels. Asset Servicing and Wealth Management comprise the key value of this legendary franchise. These are both business lines with high operating leverage enhanced by BK's panoramic global reach.
Like any value stock, BK has its warts and blemishes: a lawsuit brought by the NY Attorney General alleges that BK defrauded clients in currency transactions. A large settlement and dent to reputation are probably in the cards -- but both are already discounted by the current price. Seasoned veteran Gerard L. Hassell took the reins in August. While Hassell looks like a good choice, a CEO transition always introduces risk. Finally, the macro pressure of a weak global economy is BK's greatest present challenge.
At a time when banks are reviled from Main Street to Wall Street to Occupy Wall Street, they trade at steep discounts to any historical value metric. In short, no one wants to own them. As a result, the price is right and "The Street" is on sale. The stigma that comes with being a bank in a post-gilded age is unlikely to lift quickly, but history shows it someday will.
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