Why I Bought More of This Growth Stock When It’s Cheap
living oakit is (LOB -0.55%) the stock has recently fallen more than 60% from its peak, however, in this music video from “The Rank” on Motley Fool live, recorded on July 27Fool.com contributors Matt Frankel and Jason Hall say this could be a great opportunity to invest in the best-in-class small business lender.
Matt Frankel: I was shocked at how much this one has been beaten lately.
Jason Hall: Yeah [laughs].
Frankel: Down from 64, its price looks like half of its loans are going to default. Not half, but his price is like he’s going to see a ton of defaults, which is odd considering nearly half of his loans are government guaranteed. Forty-five percent of its loans are loans guaranteed by the Small Business Administration or the SBA.
They do a great job of underwriting. They have done a great job of keeping their default rate low even relative to their peers over time because they lend to industries they know very well and nothing else. Excellent returns on equity, excellent capital structure. It’s a branchless bank, so it’s an inherent cost structure.
He is doing a very good job of growing. It has increased its loan production at an annualized rate of 21% for five consecutive years, including the first quarter of this year. We’re going to see this slowdown, the lending volume is going to slow down in 2022. I’m not saying he’s immune to recession fears and higher interest rates and things like that, but rates of interest could end up being a net positive for Living Oak.
It pays far less on its deposit base than it charges on loans, so the spread should widen as interest rates rise. If he can control the flaws, this stock is an absolute bargain right now. I may have given some of the reasons why you just bought it, but what can you say?
Hall: So I’m going to add to what you said. I think all of those things are very, very true, but I also think it’s best in class. I really want to touch on this because you think of a lot of big banks, they’re big banks because they do a lot of mortgages. It’s just a huge market. It’s a great way to build a good loan [business]. The economics of this industry make sense. They find out, they start a business there, and then they grow it. They’re just really good at it and they’re disciplined to do it.
At 10 times earnings and you say, well, and if earnings fall well, it’s still 10, that’s pretty cheap if we’re going through a low period, you hold it long enough and it works. Just over twice the book value of a best-in-class branchless bank, its total assets are less than $9 billion. This is the one that I took a very small position that I had.
Another one of those rising star stocks that I bought years ago and I haven’t really added and say this is a perfect opportunity that I think a blue chip misunderstood bank to buy and i think the misunderstood part of me is the main reason it is rated the way it is.
Frankel: I mean, a lot of the results that you see from other companies scare people away to invest in anything to do with small business. Shopify (STORE -0.51%)for example.
Frankel: The dismissal of 10% of its workforce has just produced disappointing results. The slowdown in consumer spending, which generally works for small businesses than for large ones, as a rule.
Hall: They are not as well capitalized.
Frankel: They’re not as well capitalized, they’re more susceptible to recessions and things like that. It is therefore misunderstood in this sense. It is considered that these businesses will fail. Live Oak has always done a great job of avoiding companies that are going to fail. Really, really good compared to other commercial lenders.
Their default rate, even in normal times, has been well below 1%, well below and if they get 6% or 7% on their average loan, they have a lot of leeway for things to go wrong and that they are doing well. So I like this one. It’s one I don’t own yet. In fact, I hadn’t been following him as closely as I should have lately.
Hall: Something tells me that has changed.
Frankel: The 65% off its highs earned it a spot at the top of my watch list.
Jason Hall has positions in Live Oak Bancshares and Shopify. Matthew Frankel, CFP® has posts in Shopify. The Motley Fool holds positions and recommends Live Oak Bancshares and Shopify. The Motley Fool recommends the following options: $1140 January 2023 Long Calls on Shopify and $1160 January 2023 Short Calls on Shopify. The Motley Fool has a disclosure policy.