Waters Less Muddy for Bank of the Ozarks
It's time, once again, to be wary of billionaires bearing free investment advice.
On Monday afternoon, the annual Sohn Investment Conference is being held in New York City, where hedge-fund managers gather to talk up their best investments, hear recommendations from others and entertain the crowd. The event, hyped as the premier conference of its kind, raises money for pediatric cancer and always draws a crowd and generates headlines.
But the performance of the actual picks and pans trumpeted at Sohn has long been uneven at best. Remember, this is the conference where two years ago Bill Ackman declared that Valeant Pharmaceuticals was likely to be the next Berkshire Hathaway. Last year, hedge fund manager David Einhorn recommended shorting Caterpillar Inc. Shares of the construction-equipment maker are up 36 percent in the past year.
Tech investor Chamath Palihapitiya said to go all-in on Amazon.com Inc. Good one! The stock is up 42 percent in the past year. He also said to avoid Apple Inc. Not great! Shares of the iPhone maker are up an even better 57 percent.
One of the most talked-about ideas out of last year's conference was to short Bank of the Ozarks Inc. That's partly because the idea seemed to come out of nowhere; few New York hedge fund managers had likely ever heard of the Little Rock, Arkansas, lender. Also the person presenting the idea, Carson Block, who publishes research under the name Muddy Waters, has a good track record for sussing out corporate malfeasance or folly.
But more than that, it was a pitch perfectly calibrated to sizzle with Sohn's Wall-Street-centric hedge fund crowd. Bank of the Ozarks had grown quickly by making real estate loans to developers in Miami, New York and San Francisco, and, according to Block, was now over its head in the big city. It was overexposed to risky deals, running out of cash and out of compliance with regulators. For a crowd that remembers the financial crisis all too vividly, it was an investment narrative that, inside the golden-hued walls of Lincoln Center's Avery Fisher Hall, where Sohn is held, ringed too familiar not to be true.
The stock dropped 15 percent almost immediately, though it rebounded quickly as well. But short interest, the measure of people betting against the stock, rose by more than a third. And the stock hit a fresh low the next month.
But as Sohn faded, the bet against Ozarks fizzled. Shares of the $6 billion bank have risen 30 percent in the past year, nearly double the market in general.
It turns out once you get past the eye-popping growth, the country bankers know a thing or two about lending, even in Manhattan. Construction lending, which is generally considered some of the riskiest types of loans, has continued to rise at the bank, up 60 percent in the past year, to $5.3 billion, but losses haven't followed. Less than 0.1 percent of those construction loans, or $4.5 million, have gone bad. That's about one-third of the rate of other banks.
Chris Vanderpool, a senior analyst at S&P Global Market Intelligence, says Bank of the Ozarks tends to favor safer deals with low loan-to-property value ratios, which is why investors and regulators have tolerated its relatively high exposure to commercial real estate lending. "Credit quality is the story, and why they are so good," he said.
Even the bank's most troubling financial feature, which is what probably caught Block's eye, has improved. Its ratio of commercial real estate loans to the capital it has to cover lending losses is now 387 percent, still high but down considerably from a year ago.
Another boon for the stock is the new administration. If investors are looking for a way to play Trump's promised financial-regulation rollback, buying shares of a bank that aggressively lends to real estate developers seems like probably a pretty good way to do it.
None of that has swayed Block. He says his thinking on the stock hasn't changed, though he declined to say whether he was still betting against the company or what his position in the stock is. Block says the bank is chasing risky deposits and goosing its earnings by draining its loan-loss provisions. "I still believe that they are pursuing loan growth at a dangerously fast pace that will eventually lead them to hit a wall," says Block. "Splat, no liquidity."
That's just the kind of colorful language that makes a splash at Sohn, which is after all about bringing in a crowd to raise money for cancer. The fact that that's not really a formula for producing the best investments shouldn't be that much of a surprise.
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Stephen Gandel in New York at firstname.lastname@example.org
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