The attraction of Earnings Yield for acquirers: WIBC

The underlying methodology of our quantitative equity models is to identify companies/stocks that are very attractively priced – including debt- so as to be potential targets for acquisition.

One such holding Wilshire Bancorp symbol WIBC announced today that it will be acquired by BBCN Bancorp for $13 a share.

Lets take a look at the valuation of WIBC pre-merger:

Enterprise Value: $651m
EBITDA (trailing 12 months): $101.3m

Earnings Yield: 15.5%

On of the factors that made WIBC so attractive and why using Market Capitalization as the basis of valuation incorrect was the fact WIBC has $6.52 a share in cash and very little debt.  The cash can then be used to reduce the cost of acquisition.

No longer long WIBC

Our bearish base case scenario

Its a great feeling to wake up to the realization that our anticipation and planning for several months comes to a very fruitful conclusion this morning..  We had watched the sea of red in the futures market over night but was still amazed to see a fall of 1000 Dow points in the first hour of trading.

We have been anticipating a bear market for about a year and positioned our clients in a very conservatively in July, but didn’t expect this crash so soon.  I remember back in August of 1987 that it was a rough month as well but the real crash didn’t occur until October.   September could be another bad month as well.

This morning we sold our profitable short positions in China A shares “CHAD” and Emerging Markets “EUM”.   We’ll revisit them and others at a point later in time.  We do expect some sort of big equity rally at any time now.  We remain holders of our largest positions in long dated US Treasury bonds.

Our base case scenario is:

There is no good reason to own stocks right now.  Despite this month’s crash we believe that stocks have entered a Bear market and we expect this to last in the range of 1 1/2 years.    We expect that this month’s crash is only the first leg down for the Bear, we anticipate a very strong reaction rally which is why we’ve sold our Emerging Market and China short positions.   The anticipated reaction rally will be short lived and eventually fail where a prolonged decline in stocks will take hold going deep into 2016.

The Federal Reserve is disinterested in saving investors from themselves and frankly doesn’t have any monetary policy ammunition left.  Rates are already at 0% and several rounds of Quantitative Easing failed to lift the economy to even an average rate of growth.   No one should be surprised if talk of a 4th round of QE starts making the rounds but in our opinion it would probably be best for the US stock market to find its natural price level without artificial stimulation.  At which point the growth cycle can begin again.

The US dollar should continue its rally at some point.  How long before investors realize that selling the USD because the Fed won’t raise rates in September is a good idea?  We think investors will eventually flock to a “flight to safety” mentality and bid up the USD to new highs as they escape the erosion of vulnerable currencies.  This would bode well for US Treasuries.

The place to be in all of this mess is long dated U.S. Treasuries.  The yield curve continues to flatten and the 35 year old bull market in Treasuries is not over.   If the US economy does go into recession in 2016 the yield on the 30-year will likely drop below 2% which would provide a double digit rate of return to the TLT.

In the meantime be careful out there.

Brad Pappas