Dale Jacobs, manager of Financial Investors fund, which specializes in bank and financial stocks, is a hedge-fund manager of the old school: He buys strong stocks and shorts weak ones in the same industry. But shorting banks can be hazardous at a time when interest rates--and consolidations--have been favorable to financial stocks. Nevertheless, Jacobs has taken a short position in one little-followed bank that has been a solid performer this year: Trust Company of New Jersey (TCNJ).
Based in Jersey City, TCNJ lends to small businesses and consumers through statewide branches. The company's latest financial announcement, in January, was upbeat: Net income in 1995 was $13 million, or 62 cents a share, up from $3.9 million, or 17 cents, the year before. There was a "significant increase" in its loan portfolio, thanks to successful marketing of consumer loans and home mortgages.
But Jacobs is unimpressed. Even with improved earnings, TCNJ's financials are nothing to write home about, he says. He notes that TCNJ's return on assets is about 0.5%, half the 1% average for community banks. At its recent price of 14 7/8, the stock trades at 1.9 times book value. Jacobs notes that the average community bank is not only more profitable, but also cheaper: The usual price-to-book ratio is 1.6.
Nevertheless, the stock has performed much better than similar banks this year despite a near-total absence of analyst coverage. TCNJ shares have gained 12% year-to-date. The market's high esteem for TCNJ, in Jacobs' view, is unwarranted. "That only makes sense if the bank is viewed as a takeover candidate," says Jacobs. But it is not--and the high price hardly makes it tempting to a suitor, in his view.