TPS Trade Alert – January 20, 2016
Recommendation:
Buy Broadway Financial Corp. (NASD: $BYFC) up to $1.60 per share.
The Opportunity:
Broadway Financial is a good business stuck in a bad neighborhood.
The company owns three banks as wholly owned subsidiaries, two in Los Angeles and one in Inglewood. The bank operates under the name Broadway Federal and serves low-to-moderate income communities.
The bank’s core products are real estate loans, both residential and commercial. It also offers the usual banking services such as checking and savings accounts.
Trade Rationale:
The past has been ugly. There’s nothing like trouble to scare off investors, and Broadway has been through more than its share of trouble.
One of its branches was set on fire by mobs during the Rodney King riots in 1992.
In 2010, regulators burned the bank with a cease and desist order and banned it from making loans to churches.
These loans were a big problem, and four years ago, Broadway actually had seven repossessed churches on its books.
But things are looking up.
For the past seven quarters, Broadway has been profitable. It turned in an 11.8% annualized return on average equity for the first nine months of 2015.
Net income for the period was $3.4 million, compared to $1.8 million for the first three quarters of 2014.
The quality of assets is growing stronger. The value of total assets on the balance sheet is up, and expenses are trending down.
Investment Risks:
This is a thinly-traded stock, which is typically a characteristic we don’t like. The more actively traded a stock is, the fewer challenges you have when it comes time to sell. We’ll be happy to see an increase in volume.
The company could lose its way and venture off into making riskier loans that trigger write-downs and pollute the balance sheet.
Loan volume could slow down. Margins could be further pressured by tough competition. Net interest margin declines could become a problem.
There is no shortage of potential trouble for Broadway Federal.
But a bank in Beverly Hills could run into the exact same headwinds.
We like Broadway Federal because it’s NOT in well-off neighborhoods, it’s a value, and because it’s probably the least glamorous bank you could possibly find.
Potential Return:
In May 2007, before the financial crisis hit financial stocks like Broadway particularly hard, the stock traded at $11.01.
The stock price plunge was in line with peer banks. By the end of 2008, Broadway stock was at $3.84. For the past seven years, BYFC has been trading in a fairly narrow range, with one exception.
Last year on September 18th, the stock opened at $1.37 and closed at $2.08. Three days later, it was back at $1.37.
Will we see another sharp spike? Another opportunity for a 52% return in a single day?
We’ll chalk that up as unlikely, but we do know this.
The bank has been a quiet, solid performer. Seven consecutive profitable quarters is reassuring.
So is an 11.8% annualized return on equity. So we wouldn’t be surprised to see the stock move back into the spotlight.
Right now, not one analyst of any significance follows the stock. None of the big mutual funds own it.
We believe the investors who do own Broadway Financial Corp will be well rewarded. This is one of those stocks that could increase in value by 60-110% over the next 18 months.
Key Facts:
Company: Broadway Financial
Ticker: BYFC
Recent Price: $1.47
Buy up to Price: $1.60
Market Cap: $40.71 million
Avg. Daily Volume (3 month): 2,159 shares
Chart:
Category: TPS Trade Alert
