Tim Melvin, a veteran in the financial services and investment industry who is also the author of Marketfy’s “Banking on Profit” and “The Community Bank Investor Monthly” newsletters, saw explosive growth in his community’s portfolio.
Benzinga, which is the owner of Marketfy, spoke with Melvin about his success. Here’s the conversation that transpired.
Benzinga: Hey Tim, nice to meet you. Care for an introduction?
Time Melvin: I was a broker for 20 years and eventually left the industry. I did not want to raise assets or put my clients with money managers. I just wanted to sell stocks and bonds.
James Altucher, who is a pretty good friend of mine, was an executive editor at Real Money. I’d been writing a blog for years and he wanted me to come to write it there. Real Money eventually topped my income, I joined and was there for almost a decade.
Later, Benzinga founder and CEO Jason Raznick started Marketfy and I moved the newsletter onto his platform.
So you run a newsletter service? Please tell us more!
We’ve got a couple of products, there. The first is “Banking on Profit” and there’s a monthly “Community Bank Investor” letter.
For [the second], what we discovered is that if you put in a few criteria based on simple stuff, namely P/E ratio and dividend yield, the returns would make Warren Buffett cry with envy. About 25%-plus [per year] over a 20-year period of time.
For the “Banking on Profit” letter, we run a different system. I invented the rules and the returns are off the charts.
It started in the early 1990s with legislation that allowed banks to buy banks in other states. It was a controlled thing with the suggestion of the FDIC. That was coming off of the savings and loans crisis meaning you could find banks at 24% and 30% of tangible book values, and you were getting takeovers more than book value. It was like printing money.
I’ve written about it extensively and in 2018 and 2019 we had over 15 takeovers.
Tell us more about your strategies.
I tend to buy and hold until we get excess in the market where banks are trading at two times book. There’s never been a period where you had a lot of small banks trading at two times book that wasn’t a market top. If it gets there, I’m out.
In the interim, when opportunity is low, I do risk arbitrage.
For instance, you want to buy SPACs at a discount to the value of the cash in the trust or at the IPO. If you do the IPO, you’re going to sell some of the warrants to reduce your cost basis.
The way this is setting up right now, though, reminds me of 2007. You could buy units at a discount to the value of the trust. So, now, I’ve got stock and warrants.
When the deal is announced and the market starts trading down, I can redeem my shares and get $10 back. Say I paid $9.75. Worst case, I get a $0.25 profit rate.
I still have the warrants and so now, I’ve got five years for something good to happen. That warrant is going to have the same redemption clause. So my upside is capped at $8 and I only need a handful of these things to work.
It’s a fixed income product that will actually return to you more than Treasury bills and you’ve got free warrant kickers.
How are you approaching the broader market?
It’s grossly overvalued, especially with interest rates going up. I really thought it would have collapsed by now, which is why I don’t trade the broad market.
I’m shocked stocks have been able to go up in the face of interest rate increases and, more importantly, what’s going on in Ukraine and the nasty implications for inflation and geopolitics.
Buying the dip is working but that’s going to stop one day and it’ll be really ugly.
I’m focused on small-cap value which is more like private equity replication and SPAC arbitrage.
At the level of current valuations, where interest rates, P/E ratios and price-to-sales are, it’s going to be really tough over the next seven-to-10 years to beat the market [passive].
It’s three steps and a stumble. Every time they do three rate hikes in a row, it’s over. So, we’ll see if that’s true this time.
Tell us about some of the most challenging parts of your career.
Mid-to-late 1990s were difficult.
I was a deep-value guy buying REITs for liquidating value and small banks. You would find small REITs and smaller businesses that nobody wanted, buy at steep discounts from the liquidating value and collect the liquidating dividends for a very nice internal rate of return.
Meanwhile, others were tripling their money. However, when 2000 came, we looked a lot smarter as we weren’t down 50% or so like some of the more tech-heavy firms were.
There were also a couple of years around the top of the market in 2007.
Tell us about your portfolio performance, today.
I had a great year, last year, in spite of the fact that we came into the year with 40% cash. We are beating the market this year and have had three takeovers already.
And, of course, the bank stocks have responded well and will continue to do so as rate hikes help blow out net interest rate margins and earnings.
You’ve also got the fact that in 2020 most banks de-risked and they have a lot of cash. They’re going to be able to reinvest this cash and the proceeds from any maturities in their securities portfolios, as well as income generated by the securities portfolio. That’ll help drive profits.
On top of that, regulatory [and fintech innovation] costs will rise and that’s going to kick off more mergers and acquisitions activity.
So, you’ve got [bank] buyers, now, who are looking to grow earnings organically to make their shareholders and investors happy. They have to buy a bank of a decent size that fits into their expansion plans and whack out 35%-to-40% of the cost, which is the usual cost saving of a bank deal.
That’s how you grow your earnings.
You buy at 80% of the book and sell at 150% of the book. If the book grows 5% a year in the interim, between those two, you’ve made a lot of money.
Advice to newbies?
Read everything you can. You want to know what everybody is thinking.
Also, look around and if everybody else is doing it, stop doing it because that’s not going to make any money.
