Miles P.H. Seifert, chairman of Gray, Seifert & Co., sounds like a real estate agent when he summarizes his guiding principle for investing in banks: location, location, location.
Gray Seifert manages $700 million, about 40% of which is invested in banks. the bank portfolio is up 11% this year; last year it was up 22%. The New York money manager has stakes in 33 banks. Most are regionals in fast-growing areas of the country, such as the Rocky Mountains, the Midwest, and the Southeast. Often, Gray Seifert is among the biggest shareholders. Mr. Seifert describes himself as "wildly optimistic" about the industry.
His banks, he says, are run by excellent managers that were tarred with the same brush as those banks that were inundated with loan problems. The fact that these banks, which include West One, First Security, and Marshall & Ilsey, sell at the same multiples as money-center banks astounds Mr. Seifert and his chief of research, Amy LaGuardia. "There's something wrong here," she said.
Recently, Gray Seifert has branched out, buying stock in four superregionals: Norwest, Keycorp, National City, and SunTrust. "They are giving these stocks away," he said. Q.: Why location, location, location? SEIFERT: We got out of bank stocks in early 1987 when the earnings were coming down, and we started coming back in in 1989.
Originally, we went after the banks with $1 billion to $8 billion in assets because we saw good value there.
We stayed in certain parts of the country. Location is critical to us. Location isn't important if you own Citicorp or NationsBank. We believe our banks are a direct reflection of the local economies. We believe in the rolling recession. In the early 1980s, we built a bank portfolio with northeastern banks. We did very well, with some years up 50%. This was where the best earnings growth was.
In this bank portfolio, which Amy and I put together, we stayed in the Midwest, the Rocky Mountain areas, and the Southeast. We have nothing in the Northeast or California. We don't buy turnaround situations in any industry, which is what you get in the Northeast. Our banks have long histories of good earnings -- we don't want any surprises. SEIFERT: The regions we are in didn't have the same unemployment problems or real estate problems as the Northeast did, for example. Our banks tend to be small, but they dominate their area. You go to places like Green Bay -- where Associated is close to No. 1 -- and you find out they were selling houses all the way through the recession here at higher prices with each sale. That didn't happen in Connecticut.
West One, AmFed, First Security, and Zions are located in Rocky Mountain region, the best part of the country economically speaking, and they are showing strong loan growth.
A lot of these states, such as Missouri, had defense business and they managed to lay it off into the service business without suffering any downs. We think a couple of our banks in Missouri are among the best-managed banks in the country -- Commerce Bancshares and Mark Twain. Mark Twain is a jewel. It concentrates on small family-owned businesses, which is how we manage money. At Commerce, David Kemper is a superb banker. LaGUARDIA: We struggled hard to find a bank in Nevada, another growing state. Everything there was blown away, or taken over, or had problems. But we found a nice one in Reno and now we are one of the largest shareholders in AmFed Financial. Q.: You think North Carolina is a great state to be in, so why don't you own the big buys in North Carolina? SEIFERT: We own BB&T Financial, Centura, and Southern National. They are all superbly managed banks and they are all taking a piece out of the action of the big three.
We think Wachovia is a great bank, for example, and we think it is going to buy some of our guys. It is much easier to figure out valuations when you are being bought then if you are doing the buying.
These big banks make mistakes. Wachovia bought First Atlanta and it took them five years to get it bailed out. NationBanks has made some acquisitions, and notwithstanding the fact that the bank is running like a deer, the C&S/Sovereign deal has to cause some problems. Q.: What do you look for besides location? SEIFERT: Management is key, because banks don't show you the loan portfolios.
We think the managements of the mid-cap banks are excellent and have gotten tarred with the same brush as the money-center managements, which have made mistakes. All of our 33 banks sell at multiples that are similar to what you pay for money-center banks. So you know something is wrong somewhere.
The managements of the money-center banks are probably capable people. But I don't think they hold a candle to the type of people running our banks.
Most of the managements of our banks think like shareholders they own a lot of stock. The people who run money-center banks think more like owners or managers. Q.: You've bought stock in bigger banks recently, though, haven't you? SEIFERT: We got into the super-regionals because after the fist quarter, the market sold off these shares considerably. There was a tremendous opportunity to get into these stocks. We added four that were in the best parts of the country -- Norwest, Keycorp, National City in Cleveland, and SunTrust. They are giving these banks away.
National City has a great computer operation. Norwest is unique -- it had unbelievable performance in the past three or four years. It blankets the country with its financial operations and the management is agressive.
Keycorp is in the whole northern rim of the country. We think it is an excellent well managed company. The merger with Society will turn out well.
SunTrust has a fantastic trust operation, plus a whole lot of Coca-Cola stock. They haven't had a lot to talk about, mainly because they stubbed their toe in Tennessee in an acquisition. The chairman sat in our office and he said, you know, i did that deal myself and it was stupid. You got to love that guy. he owns a ton of stock. LaGUARDIA: We see a lot more value out there. We see more banks to buy. That's why we are encouraged. Banks still sell at ridiculously low multiples. Q.: Banks stocks have had a pretty volatile year. Will that let up? LaGUARDIA: The repetitious selling is what gets us. You should be working on 1994 earnings at this point. If you think '94 is going to be a bad year, sell them. But sell them once. Big institutional investors keep buying and selling them each quarter. SEIFERT: Granted, we got a lot of our performance last year because the momentum players came in at the end of 1992. After first quarter 1993 earnings, financial publications came out and said interest rates are going up and banks could no longer make any money, so sell the banks. April was a very bad month for owning bank stocks.
Then the second-quarter earnings came out, which were record again. Then, people didn't like banks because the interest rates were going down to nothing. Banks are stuck in a scenario in which they can't make money if interest rates are going up and they can't make money if interest rates are going down. The momentum players jumped out of the banks in July and left us with what we hope are investors in bank stocks. Q.: People are worried that earnings growth is slowing and are getting out. But you aren't. LaGUARDIA: The third-quarter earnings will be record. The fourth-quarter earnings will be fine. All 33 banks we own said don't worry about 1993, it's in the bag. They say 1994 first quarter looks great.
After the first quarter, you'll have to start guessing on the economy and you'll need some loan growth. Robert Albertson of Goldman Sachs is very positive about loan growth. We talked to all our banks and some of them are seeing double-digit loan growth.
For our list of banks, we expect to see something in the 20% range in earnings growth for 1993. Next year, we expect 12%, but that's without loan growth. With loan growth, we expect 20% in 1994. We had to raise our estimates after every quarter. SEIFERT: Recently, Bernstein said banks arc selling on 1995 earnings. That's a long way away. I don't have a clue about 1995, but we have a year to worry about it and there will be a lot of money made or lost over that period. If you start worrying about 1995, how can you own anything. We don't look at 1995 for our other sectors. There's too much that has to take place first. Q.: But banks are a cyclical industry and earnings growth has to slow sometime, right? SEIFERT: Banks are cyclical. There's a time to be in and a time to be out. When the earnings start to turn down, that's when you get out. We will wait for that time. We will not guess when earnings turn down.
Earnings turned down at the end of 1986. That was a bad quarter for banks. It gave you plenty of time to get out of the banks. By mid-1987, the bank earnings were a disaster.
It doesn't make any sense to sell banks selling at nine, 10, or 11 times earnings now on the idea that earnings may go down at some point. LaGUARDIA: We haven't even see major loan growth yet. I don't believe we are anywhere near a downturn in earnings. Q.: How about the outlook for bank stocks? SEIFERT: The best earnings gains in the future are going to be in the banks. I believe that in the last two quarters of this year, banks will be the best performers, because the earnings are the best. LaGUARDIA: We believe that the Norwests of the world will sell at a market multiple, if not a premium. multiple, if not a premium. SEIFERT: Banks are going out more to talk to shareholders in 1993. While it is hard to listen to the banks telling you the same thing over and over, none of them appear to have any problems.