FHB Longs Did Not Work, Here’s Why

 

Hi Dave,

Why the move lower in FHB after their earnings on Jan 25th? Wondering why it tanked given the set-up?

Katie B. – Bellevue, WA 

Hi Katie,

Thanks for the question. We were of course disappointed with the outcome of the earnings in FHB. Given our bullish view on Regional Banks and our longs in KRE (+8.5%) and XLF (+9%), we thought FHB would be a good way to add some more juice to that narrative.

Sometimes despite everything appearing to line up, the market throws you a curveball. At times there are things inside of a company that are difficult for any outside investor to see. In this instance, FHB revalued an asset and showed it as a loss, thereby reducing quarterly profit. Moreover, the firm increased its operating costs which limits the company’s ability to grow future earnings. Stock prices are, after all, the present value of future expected earnings. Translation: the stock drops. Bummer!

Interested in learning more about combining VALUATION and TECHNICALS?

That trade was not a winner, however, the last few weeks have been positive in terms of Alpha Trade performance. In fact, in the last three months, November 2017 through January 26, 2018, one dollar invested cumulatively on each trade would have yielded a gain of 340.93%…in three months. More realistically, if you had invested 10% of your capital on each successive trade, your total gain would be 22.51%. A $100,000 portfolio would have grown to $122,512.91. Annualized, that is a gain of 90.05%. With this methodology your risk is contained on each trade to the 10% invested. That’s a pretty nice bang for your buck!

A full listing of our trades going back to 2013 can be found here.

Here were our thoughts back on January 17th:

Traders,

Sticking with our view of ‘outperformance’ by Regional Banks (we are long KRE from $57.98 – last $62.42) we are going to dig a bit deeper.

We like First Hawaiian Bank (FHB)

  • From a fundamental perspective the valuation is close to $59….last traded $31.62….we like that.
  • Technically, a measured move from current levels points to $34.50….for now at least. (+9.4%)

So, here you have BOTH technicals and fundamentals coming together to make the case.

Action:

  • Go long from current levels
  • Stops at $30

According to my colleague Brad, this was his takeaway post-earnings.

  • The company’s earnings release included a significant charge for the reduced value of a tax asset. What this means is that their loss carry-forwards were revalued at less than previously calculated due to the effect of a lower tax bracket. Companies show this as a loss. If you’re wondering how this happens, there is a good article at the following link that explains it.

https://www.marketwatch.com/story/tax-bill-lowered-corporate-tax-rate-so-why-are-some-companies-announcing-charges-2018-01-18

  • Second, while FHB’s business remains strong and there is growth in lending and mortgages, the company has decided to raise wages for employees. This cuts into the bottom line and reduces overall profit.
  • Moreover, a portion of the tax benefit will be distributed to shareholders (a 9% increase in payout). The market would typically like to see reinvestment in more bank branches to indicate strong future growth.

These points coupled with a few analyst downgrades have knocked FHB down this morning and our stops were hit.

Have a question for me? Just ask.

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