While the two of us are very disciplined, sometimes we do not stick precisely to our “buy cheap and look for returns of better than 100 per cent” mantra. That was the case when purchasing Laurentian Bank (LB-T), both together and separately. Ben was scarfing down shares between $30.42 and $37.91; Benj bought at $39.57, before adding more with Ben at $31.12. An initial sell target of better than $50 was set – not shabby to be sure, but not a grand slam.
Since the stock was purchased, it has regularly been underwater. However, with the bank announcing this week that it is looking at strategic options that may lead to its sale, the stock price soared and, for the moment, made all our buys look intelligent.
Why did we like this company so much? The key to the purchases, which does fall in line with our system, was that the enterprise was paying a healthy dividend, and there was excellent upside potential. Plus, it is a bank, and for the most part companies in this domain do not go under. Yes, Northland Bank did in 1985 and a much younger, less experienced Benj just about cried when it happened as he had overinvested in it: not only purchasing it but then averaged down three times, a strategy that he would never deploy today. Once is possible, but never more.
This follows two very clear investing thoughts. The first: “Never fall in love with a stock, it will not love you back.” The second is that there are many unknowns with a company, and often, when they are getting the crap beaten out of them, there is negative information that has not yet reached the public.
Laurentian is not a Northland. The bank has generally been successful over the years and is an important Quebec institution. There have been hard hiccups, particularly under former chief executive officer François Desjardins, who left in June, 2020, after a mediocre five-year term. Underscoring this is that just before he left, the dividend was slashed by 40 per cent, a rare happening with financial institutions in this country.
Mr. Desjardins was replaced with Canada’s first female bank CEO, Rania Llewellyn, who had numerous immediate challenges to face.
One was that Laurentian was a David facing a slew of Goliaths, in the shape of the Big Six Canadian banks. Competing with these monoliths when a pittance of their size is nearly impossible. In addition, Ms. Llewellyn had to attempt to do this with a work force that was jumping ship in droves: About one-third of Laurentian’s employees departed in her first 17 months at the helm. Losing that skillset while doing a turnaround is exceedingly difficult, irrespective of the sector.
Topping this is that the bank was a technology laggard, and its management knew it. Getting up to snuff as a bank is both technically hard and expensive. We sense that while attempting to catch up, management acknowledged this and is raising the white flag as they just don’t have the capacity that the big boys can throw at tech.
What is the likely end game here? Our crystal ball suggests that a takeover north of $50 is a very high probability; north of $60, around the book value of $59, would not surprise. Laurentian’s strong footprint in Quebec should attract bidders and will almost certainly mean that the provincial government will want to have certain guarantees that the acquirer will retain a strong presence – including, perhaps, a head office – in la belle province.
Whoever looks to bid will be a rich institution that has lots of money, which will also increase the takeover price. (We think that banks should be paying off some of their preferred shares to make both them and the Canadian economy safer, but that is an article for another day.) The acquirer, if there is one, will be taking over a corporation that has been reporting reasonable profit: $49.3-million in the last quarter and $101.2-million in the first six months of this year. The liquidity and capital levels are also decent.
It is quite possible that a bidding war could develop as opportunities for expansion in this sector rarely arrive. Thus, because our belief is that there is quite a bit of upside, we are holding our positions, practising patience as usual, planning to collect the hearty dividend and being hopeful that a buyout will transpire. In all likelihood, if a deal is made, it will not close until next year.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter.