Tim Melvin on Community Banks and Small Caps in Europe, Hong Kong and Japan | S07 E42
Summary
Community Banks: Guest laid out a quantitative playbook (capital ratios, NPAs, uninsured deposits, and price/tangible book) and emphasized buying well-capitalized banks below tangible book for strong risk-adjusted returns.
Bank M&A: Expect accelerated consolidation due to succession issues, tech/regulatory cost pressures, and a more bank-friendly regulatory climate; he prefers owning targets at 0.85x TBV that can be taken out ~1.5x.
Key Stock Ideas: NSTS trades near 70% of TBV with ~29% equity/assets; RBB at ~77% of book with dividend and takeout appeal; HOMB praised as a best-in-class acquirer he holds post-takeover; 0019.HK (Swire Pacific) is deeply undervalued with assets exceeding market cap and a ~5% dividend.
Hong Kong: Bullish on cheap valuations and cash-generative assets; highlights Swire’s stakes in properties, Cathay Pacific, and regional Coca-Cola bottlers, and notes long-term benefits from proximity to China’s tech centers.
Japan Equities: Positive on governance reforms, activism, and buybacks lifting returns, with many quality companies still trading below book despite strong performance.
Europe Equities: Despite policy missteps, he sees many durable European businesses at attractive valuations; mentions European shippers as notably cheap within the region.
Building Materials: Sees a multi-year US construction upcycle (data centers, reshoring, factory write-offs, housing shortage) benefiting aggregates, concrete, and asphalt producers; recently bought a Swiss spin-off in this space.
Market Outlook/Risks: Cautions on lofty US valuations (high CAPE) and tight high-yield spreads; favors discounted small banks and international value over pricey US indices, noting CRE stress is more concentrated in large banks.
Transcript
I've got the little live stream icon which means I think we're live. This is Value After Hours. I'm Tobias Carl joined as always by my co-host Jake Taylor. He's in London, England. And our special guest today is Tim Melvin. How are you Tim? >> I'm doing fantastic. Uh down here in Greensboro, North Carolina today. Uh just did a high-speed drive across um across the city of Greensboro because I was stuck in a doctor's meeting and I forgot we did this live. So I told we can reschedle. We'll do it at two o'clock. And no, so we made it. So we're here. Thanks for having me. I appreciate it. >> Yeah, good job. Killed three pedestrians and uh >> well, you know, I just my wife just took the keys because she I drive like a Texan. Well, she drove here like a Texan running for the border. So I mean, but we made it. I love it. Tim, um, old friend of mine of ours. We we've talked quite a few times, uh, over the years. Uh, let's talk community banks. You've got a community bank investor newsletter. >> Yeah. And we've been doing that one for a really long time, as you know. It's um, although you you run across other stuff that's interesting. I mean, community banks have been my, you know, greatest love since the early 1990s in the aftermath of the SNL crisis. And we just stayed with it. We've turned it very, you know, very quant in nature. We've I know people that can go on these long esoteric lectures about banks and reserve banking and the sofur effr spread and what's wrong with the banking system and this and the nondepository finan none of it matters all that much. It is a lot of fun to talk about. Okay, especially some of the stuff with non-depository financial institution loans and but if there's a series of numbers and if you get them right you're going to make money. So, >> hit us with those numbers. >> Hit us with the numbers. Real easy. Capital levels. Okay. We want to look at uh equity to assets. We want to look at CT risk based capital. The higher that number is, the better. I'm addicted to converted thrifts. So, you know, over 15 and 20, you know, I will just own that stock and and not part company with it because there's at that point there's the cockroaches, Keith Richards, and that bank left after the apocalypse, right? So, so you want to have that buffer against anything that can go wrong because something's going to go wrong, right? Then the other is non-performing assets, >> right? Right. And what you're looking for here is you're just looking for bad loans, foreclosures that they can't get rid of. You want that number to be as low as possible. I use a cut off of 2%. Which in today's environment might sound a little high because we've gotten spoiled, right? Because they've been so low. Um, but I two's a hard percent off. I God could be running the bank. If he's got an over 2% NPA, I'm out. And I told I told that to John Allison one time who does think he's God of the banking industry. I said, "John, if you ever go to 2% of them, I have to sell you stock." He's like, you know, Johnny's a good old Arkansas boy. He says, "Well, Tim, I don't expect we'll ever get there." I said, "Okay, well, good, but I I'll just stock." But it's that those are the the two key fundamental numbers. Then we're always going to take a peek at um the amount of uninsured deposits. Just paying attention to that number kept you out of Silicon Valley Bank. >> Okay. So, we're going to take a peek at that particular number. But then the only other number that we're really caring about, so if we've got a great loan portfolio and we've got lots of capital, most of this stuff in between doesn't matter that much. Okay? Matters if you're a professor or you want to pontificate. But if your idea was to make money in community bank stocks, then that's really just a lot of talk because everything's going to show up in those two numbers or book value. Okay? If book value is going south, something's wrong. No matter how good the story is, no matter how good the narrative, the stock might look, uh the momentum, whatever it is, all that can be excellent. If book val book value is going south, something's wrong. Okay? So, we want to look for book value that's at least staying stable. And then price to book is everything. You make all your money in small banks when you buy them. And if you get that right, you get a bank with all the other criteria and you can get that thing at 85% of tangible book value. And you know, I stealed the phrase from Marty Whitman, but if you get all the other stuff right and you get the cheap price to book value, tangible book by the way, um it's going to be really hard not to make money. >> So, uh do you do you find these banks have a lot of exposure to? So I I'm not sure entirely sure what the reason Silicon Valley Bank fell over. That was more related to their their asset side. They'd stuck it in treasuries and they'd had more front month treasuries that were very sensitive to the move up in rates. Is that that's what I'm Silicon Valley? >> Yes. But they also had the the uninsured deposits were just these very large nonsticky deposits, right? And they were large deposits over the $250,000 mark to So once they got a whiff of a scare, they were gone, right? because they had no they they had no insurance over that level. Um Silicon Valley Bank's big problem was longdated low coupon bonds. They had put all of their assets into that for the most part and then they had um but >> those are safe. >> Yeah, they are until everybody wants their money back and then you got to take the mark on them. There there was a whole combination of stuff that went on at Silicon Valley Bank that it was never a banking crisis. It was a regulatory crisis because the in the rush to pass new regulation in the aftermath of all that, you know, if you stopped to realize that the regulators on all four banks had completely dropped the ball and just said, "Oh, they own treasuries. We're not going to worry about that." Um, so if you were following just the simple rules, you never got caught in that. And the set of chain was Silicon Valley Bank at one time was a great bank. I can remember back in the 90s thinking I was a super freaking genius because I found this bank that was banking all the tech companies and there were collected warrants and I bought it at 15 and I'm a genius. I sold it at 45 and then I sat there calmly watched it to go to 600. Um but so yeah, if you get those numbers right, you're usually going to avoid most of the other problems uh that are going to come up in the banking sector. People over complicate this. >> What's the >> Is there sorry >> more is there more or less economic sensitivity with the smaller regional banks compared to say like the bigger bigger banks? >> Less I mean the small regional banks I think it's a wonderful life, right? That's kind of what we're going for is the Bailey building. >> Jimmy Stewart. Uh >> yeah. Yeah. So it's they're not they have no loans on large office towers and downtown buildings. And that's been one of the funniest things to sit back and watch over the last couple years. Well, community banks have the mass of exposure to commercial real estate. I'm like, yeah. And I love give me more of this. This is Joe's gas station and Fred's doctor's office, right? and a four-story office tower on the edge of town that's full of accountants and doctors and lawyers and you know local advertising magazines and brokerage agencies and real estate firms. These folks were coming to work when they weren't supposed to. They never had the empty office problem. They never had the vacancy problem. There will be a rollover problem on the loans. That's a fact, right? You've got all this loan that was out there. some of it's going to roll over, the rate will go up. It that's going to be a very easy pass through. And indeed, when you look at commercial real estate loan losses in community banks, they're really low, right? Most of the problems in the banking area that you see, the the commercial real estate office, it's at big banks. It's a big number, but it's a big number on a massive balance sheet. So, I hate to say it doesn't matter, but it doesn't really matter that much. Um, and it's the same with uh today's hot button, right? Non-d depository financial institution loans. That's the bad word. And that's what's lending to private equity funds, to private credit, um to um commercial lenders outside the banking system, fintech lenders, which by the way is code for subprime in a suit. Um and >> this is what you would call the shadow banking system. >> That's the shadow that's the shadow banking. And the shadow banking industry is backed by the banking industry. Okay. Um there may be some problems that show up there, but it's not the first bank of Peoria's problem. It's Jamie Diamond's problem because all of that papers on the the the larger bank sheets for the most part. Community banks taking deposits, they make local loans. One of the things I love that especially I deal in really small banks for the most part, you know, they know the buyer, they know the piece of property, they know who tenants are probably going to be, right? They're very well associated with what's going on here. So, they know the deals not to do and the deals that you can go ahead and maybe bend the rules on a little bit, which gives them kind of some insulation. Um what you'll see in community banks when the economic the economy slows down is those with CNI heavy portfolios commercial and industrial they'll start to feel it right because Rosy's salon has no customers and she can't make payment okay so we will see some of that um but even if you go back to 2008 um when things were blowing up it was only the banks that did stupid things that that got into deep trouble and by the way all crisis were created by banks Every banking crisis is created by bankers doing something stupid, right? If during the the little 2023 banking crisis that really wasn't a banking crisis um where the four banks failed, uh and I forget who it was, but it was a great shot. It was just a shot of a guy from the knees down in khaki slacks and he cuff on the cuffs on the slacks and tassels on the loafers. I just said, "If your banker dresses like this, you don't have anything to worry about. Yeah. >> What's the old joke, Tim, about like uh you know the the small town banker that that won't lend anything no anything further than he could see from the top of the water tower. >> No. Yeah. Exactly. If I can't see from the top of the water tower, I'm not going to make the loan. And uh that is just a tremendous business. And it's not like I I didn't discover this. Okay. People have been doing this for a very long time. And you know, everybody holds up Peter Lynch as the great growth stock investor, right? And I'm not taking anything away from Peter Lynch. He's uh one of the greatest investors of all time. Go back and take his fund returns apart. He owned when he retired right in uh 89 was it? He owned every thrift in the United States because he had a guy that this guy's job was to go around the country and put money in the mutual thrifts so that when they converted, Peter could buy the IPO and hold the stock because that's layup money. uh the rules have changed. It's not as easy, but he owned literally every thrift and if he could get them that met his guidelines, he continued to buy them right up to the day he left because at its core, small town banking can be a very good business. Now, right now, it is a much tougher business than it was back then because regulatory costs are higher. You know, Jamie Diamond spends a billion dollars a month on technology. First Bank of Peoria cannot do that. they have to go out, they have to find the licensing deals and agreements. Um, and it gets very complicated now because when you go out and you acquire technology from a vendor, you're not just responsible for your employers to the regulators. You're now responsible to your vendors to the regulators for your vendors employees behavior. So, it's a regulatory nightmare. The other thing that we're seeing in um community banks is succession. It's a problem, >> right? We had a bunch of banks started in the 80s and 90s, particularly in the 90s after the uh Regal Act was signed by President Clinton. Um these guys are getting old, really old. Um they're older than me, old. Um and they're looking for a door. And nobody graduated Yale this past spring and said, "You know what I'm going to do? I'm going to go to work at a three branch bank in the Midwest." I'm I'm super stoked. Not even the last guy in the class, you know, the NBA class had that top of brain. So succession's a problem now. So all of this >> I'm surprised that's not like there aren't search funds that are trying to do something about that because I mean that sounds maybe more fun and interesting than going and running an HVAC rollup. >> Well, yeah, but you get paid a lot more money to run the HVAC rollup. I mean, you want to have some fun, you have some some fun, go in and pull the 10Ks and look at the salaries these guys are getting. M >> you know a small town banker getting a quarter million bucks that's top dollar you know the the m the smaller regionals 400,000 500,000 and you know dilute the stock with stock options and then go to the shareholders meeting okay uh it's not look I've been to shareholders meetings in the basement of churches with these things okay and it's all the local business people and they know what you did they know who you did it with and they know if you patted your own you pocket a little bit and you're going to pay a price for it. So, but um what this is doing is and delayed, you know, for a few years now, but it's kicking off another wave of acceleration of consolidation. You know, consolidation has been kind of grinding on and then you'll get pickups under the Biden administration and it's I don't care about the politics of it. They did not like banks. They did not like M&A. And when you put the two together, um, they killed deals that they shouldn't have killed. You know, they killed a couple deals where I went through and I looked, I'm like, why did they kill this deal? There's there was no reason. They just could they drug their heels on others. Um, it was very hostile environment for bank and banks and bank M&A. And again, politics aside, this administration is very friendly to banks. They're rolling back regulations. Michelle Bowman, whose family owns a bank in um Council's Bluff um Kansas, Farmers and Dro's Bank, big bank. I'm sure you've all heard of it. You know, that's been around for a long time and it's still only got 200 million assets. She's a community banker, right? She's worked Tellerline. She kind of understands what it means to be a small town banker. So they're they're size fitting the regulation and they're making M&A easier and we're already starting to see it. I think we've had a sudden burst and in the last few months banks we've held for the last couple years we had four of them bought. I think 2006 you're going to see a real acceleration of this. >> Do you want to get bought out or do you just want to earn the the ROE? >> No, I want to get bought out. I'm >> okay. Now look, if you get you get the right buyer, right, then I'll hold the bank for a long time. You know, I I love telling the story about John Allison of Home Bank Shares. Um John, I wrote a bad article about his bank one day. I said stock was really expensive. And John Allison, if you don't know who he is, it's worth reading about him, but he and his partner Bunny Adcock. Okay, so you got Johnny and Bunny bought out a bank with FDIC and assistance back in 1990 in Conway, Arkansas. Okay, small town, small bank, $25 million. Johnny's a really good businessman and he's brilliant guy. So I wrote this article one time at Real Money and I said, "Hey, you know, good bank, but it's almost three times book. That's ridiculous." This man tracked down my phone number and called my cell phone on Saturday morning at 11:00. I pick up the phone. I'm like, "Who the heck?" I got a friend in Conway. I'm like, "Did Chris change his phone number? Let me see who this is." He's like, "Damn, this is John Allison, the CEO of that bank you wrote about yesterday, and I don't think you were very nice to me." But I got some >> That was implied, believe me. But I got to know John and he's a great banker and he does about a deal a year and he's never made a bad deal. If John Allison buys one of my small banks and it's happened a time or two, I keep the home bank shares that I get because it's a great bank. So you make the decision whether you're going to keep the acquiring bank on a case- by case basis. But yeah, I generally speaking, I want to get bought out. Absolutely. I want to get bought out. Um, and you're looking at almost an arbitrage there of 85% or less a tangible book. Deals are currently averaging about one and a half. I will take that spread all day. And where it gets to be magic is if you can get it at 85% of book value and they grow the book at 10% a year. Okay. Then big things start to happen. >> Do you have any names, Tim, that you can take us through just to give us a flavor of what what it's like? >> Let me I had pulled a couple up here. Let me just get back to the portfolio here. Bear with me one second, guys, because as you know, I was running very late coming in here today. There we go. Pull this up here. Could I ask a more meta question before that while you're digging out? >> Abs. Absolutely. You know, if you think about like do young people have a uh you know, because I imagine that they're a little bit more inclined toward digital, a little less wanting to go into the bank locally. Maybe that's less important. Maybe I'm wrong about this, but I'm just imagining a less sticky customer base with the younger generation relative to maybe their parents or their grandparents. Is that >> intuition accurate? >> Not really. Because if you can and SoFi's figuring this part out and we've seen some other bank figure it out if you can meet their needs right in other words don't make them come into the branch offer them the digital services and it's a transition for a lot of bankers but um you have to get the tech right if you get the tech right they'll stay with you now they're not old enough for this to be a definitive statement you know making a you know statement about the longevity of a 25-year-old would be kind of silly at this point in time but it does seem that if who can meet their needs digitally. uh they will stay with you and um I we haven't tested this yet but we will in the next banking crisis that comes along how soon they discover the importance of FDIC insurance although we have actually we've seen a little bit of that at SoFi their deposits went up when they started offering insured accounts right something about Americans we love that FDIC insurance especially small depositors that really don't maybe not understand the banking system and how it all works. They kind of like the feeling that the government's going to back them up if things go wrong and punish the bad guys. So, um I think if you if you meet them digitally, they'll stay with you. However, if you cannot meet them digitally, you do have a problem and that is drive that's actively driving M&A. Okay. Um and you'll also see the usage of AI playing a big role in this going forward too. But let's do some names. Now look and guys, the names I'm about to give you are small banks. Okay? If you use a limit order on any of the banks I'm about to tell you about, your major contribution to the day will be buying lunch for a trading desk at a small brokerage firm somewhere in the Midwest of America. Okay? And it's going to be the best lunch they've had all year. So, um, one of my favorites, and this is a former converted Thrift, uh, Toby. It's the Northshore Trust and Savings Bank. It's now called NSTS Bank Corp. The symbol is NSTS. It's a really small bank. It does not trade a lot on a day-to-day basis, guys. So, please be smart. Use a limit order, >> but in a world where a 10 10 is a high equity to asset ratio, they have a 29. It trades at 70% of tangible book value. Okay, just a super cheap small branch northern Chicago suburbs, former Thrift, you know, trades by appointment from time to time. But you would have to work so hard to lose money in that bank. It's crazy. Two days ago, I would have given you Blue Foundry Bank, but they got bought out. Um, RBB Bank Corp out in LA. Um they are a Korean uh bank. They u do business with the Korean-American community trading at 77% of book value, a three 3% dividend and a 12 equity to asset ratio. So um >> when you see that equity to asset ratio, what when they're when they're more conservative like that, what does that indicate about what they're doing in the business? Why do they tend to run more conservatively? Well, the more a they're more conservative, okay? Uh b in the case of like NSTS or some of the other uh former Thrifts, uh they took in a bunch of cash during the uh Thrift conversion offering. And in a Thrift conversion offering, here's what happens, Toby. We have a hund00 million bank. Okay? We're Thrift. We're own by depositors. We decide to go public. Now, we have a hundred million in assets, right? So, we're going to sell 10 million shares at 10 bucks. That's 100 million. So, at offering closes, what do we have? We have 10 million shares outstanding, but we have 200 million in assets. So, we've sold stock at 10. It's now worth 20, but we bought in just a ton of cash assets, and they tend to just kind of be there. um and they'll just hold them in short-term securities, collect the the money off of that. It is a very conservative approach to banking. It's a very old-fashioned approach to banking. Uh but generally speaking, the banks that hold higher capital ratios are the ones that will not get in trouble when things do go bad. Um, and you know, as Charlie Munger said, you can make a lot more money avoiding stupidity than you can by being the smartest guy in the room. So, and bankers with high capital ratios, really conservative, happy to hold capital. The excessively high ones tend to be former thrifts. >> So, the just uh the RDB, which was the um was it RDB? The Korean American Bank. >> RBB Bank. Yes, >> BBB. >> Yes. >> Yeah. And I'm kind of they're in LA, but they've got branches around the country, and I'm kind of shocked that they have not been purchased yet. Um because there's been a general uh consolidation among some of the more ethnically oriented banks. >> And what's the what's the story with IByond? They're well capitalized. They're >> well well capitalized. They serve the Korean-American business community. I mean that and that is the story, right? That's a really loyal uh b the Chinese American Korean-American banks on the west coast and there's some branches in like Washington DC I believe. Uh they tend to have just this really super loyal ba deposit base. They come to them first for loans. So just a great business but there's been a lot of consolidation in that space. >> Why do they tend to trade cheaply? >> Nobody cares about them. I mean, that's just, you know, bottom bottom line. Um, nobody really cares about them. They see them as completely, if you just do it by the numbers, they're all commercial and industrial and real estate in LA. Real estate in LA causes cancer. We all know that. >> It says it on the door. >> Says it on the door, right? There's a warning. Um, so they're just And all of the ethnic banks are trading very cheaply right now. Uh, they're just out of favor. Nobody's paying attention. They've they're not AI banks. They're not a sexy story. Um, so everybody's just kind of standing the side. >> And what sort of return would you expect absent the takeout in something like RBB? >> Well, I mean, if I can get it's going to trade up the book at some point in time when the banks come back into favor. uh you know if they can continue to earn a you know a double-digit um multiple on uh ROE then I think you know a double- digit compounded return is reasonable to expect over time that doesn't happen overnight >> and so what sort of returns are they getting on equity or assets in something like that >> let's take a look at RBB uh RBB right now is doing a seven on ROE and a very low ROA. This also makes them a very attractive takeout target. Um, and RBB really to me is a takeout target more than anything else. >> Okay. Um, let me give a quick shout out to everybody who's at home. JT JT's just fallen off briefly, so we'll see. He was he would ordinarily give us uh veggies at the top. Yeah, here he he's back. Let me just do uh I'll give a quick shout out JT and then we'll do some uh do some veggies. Uh >> Lousan, Switzerland, what's up? Seron, Cleveland, Toronto, what's GX? Barney main streets of GX. You got to help me out there. Is that Georgia Boisey? So I got a I got an instruction on saying Pikfa and I' I've failed terribly, but Patika, what's up? Valpare, what's up? Kawaii, good for you. Tallahassee, Mter Ray, Mexico, Jupiter, Florida. Sam's already won. Toronto, Lisbbora, Portugal, Fort Collins, Colorado. I think that's it. San Anton. Everybody's taking a break for Thanksgiving. JT, you gonna hit us with the uh veggies and then we'll come back. We're going to talk small caps with Tim. >> Yes, sir. All right. So today I wanted to hit us with a what's new in Michael Bubbison's updated cap allocation paper that came out a few weeks ago. So it's not going to be a full recap. It's just what's changed since the earlier version of it that I think I did a book report on already at one point. So um the big picture is that uh this new data from 2024 and into 2025 makes the story even clearer than it than it was that US corporates right now are cash machines really uh in an intangible heavy world with a lot of option value that's concentrated in a very small set of the the mega caps. So here are seven observations from the white paper. Uh number one uh intangibles are now clearly driving the capital stack. U 2024 US corporate capital deployment was roughly 7.5 trillion dollars. Intangibles which are R&D and investment in the SGNA line items now are uh 13% of sales and are bigger than capex now uh which is is saying something. Uh so the center of gravity in the the capital allocation universe has definitely shifted to the intangible world. Uh number two leverage today is lower than history which might be a bit of a surprise to you uh even after a decade of cheap money. So this is non noninancial corporates debt divided by total capital around 15% today uh versus 26% historically. This has happened, you know, after historically low rates. Um, and so contrary to probably the usual narratives, uh, the US corporate is actually kind of entering the next regime under levered versus history. Uh, long run return on invested capital including intangibles is around 9%. Uh, and that's basically they're generating more cash than they they productively reinvest at this point. Um, so it's it does tend to support these like kind of structurally like higher payout ratios. Excess cash and short-term investments are 7 and a half% of assets up from 5.8%. So half of all the AC excess sits in fewer than 70 companies and a quarter of that is in just 10 companies. So the real capital allocation option kind of in the system is locked inside a very small group of mega caps and their decisions are going to end up moving the whole ecosystem really. Uh so we got to kind of pay attention to that. Number five is the uh the index has obviously flipped to intangible heavy sectors. So IT, healthcare, communication went from 26% of the S&P 500 in 1970 to more than 50% today. Um so now really like the benchmark itself is built on intangible heavy models. Uh capex and R&D growth are effectively a four-firm story. uh the first half of 2025, capex is up 15% year-over-year. 60% of the incremental dollars came from Amazon, Meta, Alphabet, and Microsoft. Uh so this infrastructure buildout is is in AI is very extremely concentrated. So basically, if you you own or you're underweight those four, you're taking very specific capital cycle bets today, one way or the other. Uh I don't know necessarily which one's right, but um working capital is no longer much of a lever that used to be. Networking capital fell from 30% of assets to sub 10% today. So that classic kind of like free up working capital play uh is though that was the in the NBA playbook uh is mostly done for many businesses. There just isn't really much juice left to squeeze out of that that lemon. Um, so summing this all up, more intangibles, less leverage, huge concentration of optionality and capex in a handful of firms. So as an investor really that that forces really a simple question like what game are you actually playing in this world right now? Are you underwriting old school capex stories in an economy that's running, you know, increasingly on code and customer acquisition costs, or are you deliberately betting on a small handful of giants that will hopefully profitably deploy all these cash flows and this cash into a very uncertain AI future. So, you know, with that, I'll let you gentlemen uh place your bets wisely. What do you what do you think um this one one of the series that I tracks is margins for S&P 500 400 600 and they're clearly all of them are close to all-time highs although so they're all all at alltime highs and that Buffett comment and it's it's been echoed by a few different investors I think Janm >> and Husman as well have all said anytime you see profit margins above 6% you're likely to see some mean reversion but the S&P P500 is at like 14 14.9 like plus 14 which is more than two times obviously 6%. Is any of that >> the math checks out? >> Is that uh is that a product of working capital optimization or is that just they can charge higher prices that paying out less on the other side? Anything that you've seen that explains that? Uh I mean you could reference uh James Mete did a piece on this about it was a bit of a miaulpa I think that was even in the title of it. Um like he had predicted being a GMO guy uh that profit margins would mean revert and this was he wrote in like 2012 or something. >> Yeah. Um and then he looked back at it a decade later and um they had not been reverted and if anything they'd gone the other direction and his answer was that um a lot of it had to do with government stimul like running deficits basically uh was kind of one of the primary takeaways as to why that was the case. Uh I think there's also probably a reasonable argument of call it regulatory capture or uh you know lack of antitrust probably. Um there's some pretty cozy comfortable igopolies and monopolies that that exist that are just earning supernormal profits. So who knows I I it's that's a very big complicated system to try to like ascribe to a couple of variables is quite difficult. The monopoly thing is funny though because even in the small caps they're running at historically high margins. >> I think low cost of debt might play a role here too because money has been >> interest expense very low >> really cheap since 2009. I mean it's um I think that probably play plays a role in there. I think >> corporate taxes too low. >> Yes. Thankfully let's let's not do away with that. No mean reversion there guys. Lower is better. >> Well, we'll see. I mean, uh you balance that against the guillotine risk and maybe it's not uh maybe it's not the worst thing in the world. >> Then there's that. >> What What did What did you What did you take away from from the piece, JT? What did What did you What should we be looking at? I told you 120% of my knowledge uh just now in the uh No, I mean I think it's it's um like I said I mean I think it's going to come down to a handful of companies and what do they do with their cash that's going to dictate a lot of the return on capital, a lot of the profit margin numbers because they're just such huge companies. like they just really like they take they make up a ton of the market cap and they take up a they create a lot of the economics that that is uh accounted for in the S&P. So as they go so go with the index and so I don't know I mean when I think about some numbers I've seen where the um by I think starting next year there's going to be what like 500 billion of depreciation flowing through these income statements uh next year. That's not an insignificant number to to mark against your earnings. Um, >> yeah. At some point that stuff kind of has to matter. So, I don't know. We'll find out. There was a there was a paper, I think it's a 2005 paper, something like that, that the investment factor paper where they said that basically you want to avoid companies that have these very high investment making these very high investments because they tend to underperform. The problem is that since that paper came out, that whole relationship has flipped and the the investors are the ones that have outperformed. But the full data set says that the investors underperform. I don't know. I think it's either one. >> It's every data set right now, isn't it? Like >> literally everything it's like, do you want to be right from the last 10 years or the last hundred years because they're polar >> opposite choice. >> That's a choice. >> Yeah. >> Yeah. That's exactly right. It's enough to drive a sane man to off the edge. >> When the going gets tough, the pro the weird turn pro. Is that the >> right that Hunter Thompson? When the going gets tough, the weird turn pro. Yes. >> Uh well, speaking of one area that has been sort of dead and left behind. Let's talk Let's talk small caps. >> Okay. >> What? Let's start with this. What's the attraction of small caps, Tim? >> Uh there's not much. most of you know when you look at small caps you can find bargains and you know this Toby I mean you kind of in the same space uh uh by default using the uh the acquirers multiple you tend to come up with with you know cheaper stocks but right now we're in that phase where the the stuff that you can find keeps going down so um it's it's just that kind of environment at least in US-based stocks >> I will say that that may be turned around at the beginning of November. >> Oh, >> we're measuring we're measuring value in fruitfly lives these days. >> Yeah, >> it's been three Liz trusses. >> It's been it's it's been three weeks of not being waterboarded. >> Yes. Well, I mean, you know, and everything's up today rather nicely, but uh when you look even at small caps in in the US market right now, if you, you know, apply credit filters, you're still not coming up with a ton of names. And as I said, what you do come up with continues to go down. >> Now, where outside of small banks, where I can point and say that's cheap. I want to own a lot of that. Right now it's Europe and Asia. >> In Asia, is it primarily Japan or where do you where are you finding? >> Um actually Hong Kong. >> Tim just did a Hail Mary. >> Yeah. Uh we are uh we we uh we're buying Hong Kong. >> Okay. >> I mean look, I brought Swire Pacific and and I brought it, you know, recommended it, bought it in my own account. SWire Pacific owns uh 82% of Squire's property. That portion that they own of SWire's properties is more than their market cap. They also own 45% of Cafe Airlines. Oh, and you know, most of the Coca-Cola bottles bottlers in Southeast Asia. So, it's reasonably financed. There's a 5% dividend. What's the knock on it? It's in Hong Kong, right? Yeah. And China has been been the quietest bull market, I think, in the history of the world because we're we've all sat around for two years talking about how terrible China is. The property >> even uninvestable. The government's failing. They're not using oil. It's awful. It's terrible. And the stocks just keep going up and up and up and up. And it really hasn't happened in Hong Kong so much. We're playing a little bit of catchup. But god, it's cheap. And I look at the property markets and they're not having the same office vacancy problems and apartment vacancy problems we're here in the United States. They have a PR problem >> because these properties are, you know, they're still kicking off cash. As Hong as China continues to develop, Hong Kong is going to continue to play a bigger role. Um, if you look how close Hong Kong is to the tech centers in China, as the Chinese technology industry develops, it's really good for Hong Kong. Now, that's all the big macro stuff and it's really cool stories. The truth is, I'm buying it because it's too cheap not to buy. >> Yeah, I was just there last week in Hong Kong and it's first time I'd ever been there. I really liked it. the um it's amazing these just like basically if he took New York and put it on an island and or you know like a tropical island and just built it into the side of the mountains. It's like it's pretty incredible, >> right? It had no EPA overlooking the harbor and all. Yeah, they that's Hong Kong right there, man. But but you know things are happening in Hong Kong and they're pretty good and um I just the the closest >> Yeah. the they're so close to the technology centers of uh mainland China that I think that's going to be a big carry through and the fact that you can buy this stuff so cheap get paid a nice dividend and look I didn't put my net worth into it okay and I don't recommend anybody else do but as part of a diversified portfolio of global stocks you know Hong Kong is cheap uh Japan is certainly cheap and you know I I'm going to have some great fun um Thursday at my son-in-law expense because he's an economist and he's been explaining to me all the ins and outs and financial intricacies of why Japan was on the verge of failure for a couple years now and why their banking system and the carry trade and blowing up. It was terrible and awful. And I'm just sitting here going, "Yeah, but they they they doubled and they still traded 80% of books. So, I don't really care about your argument anymore." So, we're still finding some value there. Uh we own European shipping. uh uh AP Mhler Marisk is still sitting there and the stock is ridiculously cheap. Um, and if you just run, and we started doing this, um, over a year ago, just take the old Ben Graham perfect stock rule, right? Under book value, less than a point. 4 debt to equity, current ratio of two or more pays a dividend, and it's crushing US stocks, right? I mean, just makes the MAG seven look sickly uh over the last several years, and they're still cheap. That's a That's a narrative violation. So, >> I'm sorry. You know, my life is a narrative violation, so I'm comfortable with that. >> Why Why are they trading so cheaply? What's >> Because they're Europe, right? It's, you know, the US is now like this massive dominant player on the eur, you know, the global stage, the global economy, global markets. And Europe is seen as these totally one million% incompetent, stumbling, bumbling fools and idiots who get everything wrong. And there are grains of truth in that. Okay? I mean, you if I was going to write a script on how to really screw up your energy policy, right? I would just take government policy from Germany and a couple other nations around Europe and write my movie. um they've made a lot of mistakes, but you got a lot of great businesses in Europe, right? You've got, you know, a lot of 200 year old businesses that have seen it all and done it all and they're still there. And much like California, as much as we point f fingers and go, haha, there's still a lot of people living there and they're buying things and they're buying clothes and they're driving cars. Although in California, I think that's a felony. But um sorry Toby I had to take the shot. Um Europe is still there. It still exists. It's still doing well. It's still got great businesses. They still have warms my heart as an old man. They have a dividend first policy. They like to pay dividends, right? And then you look at what's really happening in Japan where they looked around and said, "Look, you can't keep doing this cross ownership, this little, you know, gentle corporate mafia thing that we've been doing for centuries." You know, I can remember the first time I invested in Japan, it was because Marty Whitman bought all these uh property and casualty companies in Japan. And Marty is one of the smartest guys that ever lived by his own admission. He got lazy at the end, but when he was working, he was, you know, he was killing it. Um, and he thought he was going to go and play activist. That was funny. Now, we all did eventually make money in the stocks, but he thought he could kind of put the squeeze on them. And no, they all owned the majority interest of each other. It was like this impossible thing to unwind and activism. He complained to the government. They went, "Yeah, that's that's nice. What are you doing here, white man? You know, get out of Japan." Um, today they looked around. They said, "We need we're going to need foreign capital to do all these things." So, we have to loosen the restrictions. They the main stock exchange said, "Look, you got a year. Get your price up over book value or we're going to delist you." You know, you got to end your cross ownership. So, now all of a sudden, activists are winning. Elliott actually won an activist campaign, right? This is this is like a huge deal, right? And we're seeing buybacks and all kinds of, you know, 20th century United States markets kind of stuff going on in Japan. And it's really good for the stock market. And you can yet you can still buy these really good businesses, uh, with great balance sheets, by the way, for less than book value. So, I know there's all sorts of double top secret financial stuff going on in the background because my son-in-law goes on and on and on about it. Um, but I don't really care. It's like the um SOF for EFFR rate that everybody was all jacked up about last week. Well, I looked at it and went, "Yeah, okay. That's because of Treasury issuance. Are we done talking about that now?" I mean, it's all great and it's all conspiracy theory and it gets clicks and likes and it doesn't matter that much if I can pay 80% of book value and they don't owe anybody any money and they have good credit and lots of cash. Your prime minister can be the biggest that ever walked. I'm probably still going to make money. So yes, Europe and small banks are kind of really where we're focused right now. >> I've heard that uh rumblings that Korea is like five years, you know, behind Japan at this point as far as sort of that that story of uh corporate governance reshaping um a lot, you know, a lot of heavy balance sheets that could potentially be unwound. >> Yeah. And I and I think we'll eventually get there. And right now you the Korea electric power is cheap. It's been cheap forever, but if you buy it when it looks like North Korea's ready to invade, um I've made money every time they're doing it's like I want to send the guy a Christmas card and say please threaten to invade. You know, I need some cash. >> He's he's your best. >> Yeah. I mean, he's a great indicator. He threatens to invade. Stocks sell off. We buy a little bit. He doesn't invade. It's uh it's the old and it's still one of my all-time favorite market stories is the guys at Tweety Brown. Um Howard Brown went out to lunch one day and I think I forget which one of who was Joe Riley was on the desk and it was um Bay Pig, not Bay Pigs, I'm sorry. Um uh the cre the Cuban missile crisis. All of Wall Street scared to death. Markets are dropping like a stone. The market was already down before the the missile crisis. Things are collapsing now. Tweety Brown is This is old school value, right? They were Ben Graham's broker. They've been around a minute or two. Okay, I'm going to have to call that back. Um, so Howard goes to lunch. He comes back. Joe's at the desk. They're doing they've got everybody's huddled around the little black and white TV where they're predicting the imminent end of the world as the ship comes ever closer. He's calling every broker on Wall Street and he's just buying and buying and buying and buying stocks. Harris says, "What the hell are you doing, Joe? There could be nuclear war. We could all be dead." And Joe said, "That's right. And if there's nuclear war and we're all dead, nobody's going to care. They're not going to be here to care. But if they don't have nuclear war, we're going to make an enormous amount of money." Firm had one of its best years ever. So >> on margin, you might never have to pay it back. >> Right. Exactly. Yeah, exactly. >> So that and that's, you know, Korea's been like that for a long time. Every time there's an invasion risk, it sells off and you can make some money there. But they are well behind Japan and in making big corporate governance changes. They still have a lot of the interlocking going on. >> That um the carriage trade thing that's not is that a risk to the Japanese stock market or is that a risk to the American stock market? >> I think it's a risk to the I think it's a risk to every other developed market in the world more so than Japan. That's not the way the story is being told, but um yeah, because the idea was you borrowed the cheap money there and then you bought stuff somewhere else. So um >> and their rates have been rising. Their rates are the highest that they've been in 20 or something. 20 >> way over Yeah. over 30 years now. It's been a long time since rates were this high in Japan. Um but it doesn't seem to be impacting um Japanese stocks at all. I mean had had went down one day last week, but so did everything else on the planet. Um, >> anything in America, Tim, that you find interesting outside of the banks? >> Uh, I mean, not not that I'm like, you know, aggressively committed to at this point in time. We did buy some of the uh Amry spin-off AMRZ. Um, it's building supplies and materials, aggregates, concrete, asphalt. It's going to be a lot of building in this country. Um, a lot. Uh we are going to be building the data centers. We're going to be, you know, look, you get to write off manufacturing facilities and factories um under the big beautiful disaster. Oh, uh Bill, I'm sorry. Um so you've got that construction, you've got reshoring of factories. There's a lot of homes that have to be built. We're millions of homes short. Um and that's going to use a lot of building materials. This thing gets spun off by a Swiss company, by the way. Nobody cares about it. Nobody understands it. It's a great business that has done nothing but drop since the spin-off. >> So, we bought a little bit of that. Um, let me just pull up the actual sheets here so I can talk from a position of authority. We bought Goodyear Tire and Rubber actually uh with the $2 billion uh capital infusion from asset sales and the fact that they make their most of their tires in the United States and are puts them in a very good competitive position against uh most other tire companies bought some of that uh before that began its runup. Um if >> and EVs are not a threat to tire companies. If anything, EVs chew tires. >> Yeah, that's what I've heard. you know, and I'm not, you know, I'm not a big tire uh expert, but Goodyear is an old American company. They were doing everything right is trying to undo the mistakes of the past. Um, it's it's hard for me to find a lot that I want to, you know, be really super aggressive about in the United States right now because the indexes are at ridiculous levels. And I don't care how you cut or measure that when a 40 cape ratio is a 40k ratio. And when I look at credit spreads, they're about as tight as they've been. They've weakened up a little bit, but that's a lethal combination. And you go back through history and you find sub 3% high yield credit spreads and a cape ratio say of over 30. I mean, that's lethal. So, I'm being very cautious and it's got to be super cheap. You know, we we bought CarMax when it imploded just because I love CarMax. What were the other times when you had a tight spread and a high cape? >> 2000 >> 1999 um and you can't go too much further back because you didn't really have a high yield uh high yield credit spread that was measurable before then. But 2007 you got into the same situation and 2019 you got into a very similar situation. So, and it's look, it's not a you must act immediately right now. The market's going to drop tomorrow, but it's screaming something about forward returns and the guys, I I'm not sure what this is, but it's a doctor's office. I think I have to take it. Give me two seconds. >> Emergency. Uh JT, we would tell us a little bit about uh your uh your >> your trip to Hong Kong. What are your learnings of Hong Kong benefit glorious nation of value for us? >> Yeah, did a little Asia swing of uh Tokyo, Hong Kong, and then Shanghai. And um generally speaking, it's kind of similar to our trip earlier this year that we did together where you just come away from it thinking, gosh, there's so much commerce happening on this side of the planet. And um that when you're living on the other side, you just sort of take a little bit or you're just a little blind to um chi Chinese people really want to work hard, try to get ahead, make make money. Um >> 996 >> build businesses. Yeah, it's as 996 as ever. Uh it's just really impressive. >> They're they're working quite quite hard there. >> Sorry, I had to step away for a minute there, guys. >> No problem. Yeah, I only caught part of the Asian thing, but I did um Henry McVey and his team at KKR. They're really good on macro, by the way. If you're only really one macro guy, it for me it might be him. Um and one of their major themes is um interasian commerce. They see it as huge because of the ongoing arguments between the between the United States and China on trade. They're doing more and more business between themselves and amongst themselves and they they see it as like a really high return investable area. >> That's interesting. Yeah, you can kind of imagine that. I mean, if the supply chains do a little reconfiguring, >> who are the big beneficiaries out of that? >> Vietnam, >> Singapore. >> Viet Vietnam, Singapore to be sure. And I'm still doing some work on that. I haven't got anywhere near as far along as I'd like to be. So, but um just >> got to be inflationary for for the west, right? Because you just like those cheap goods and services or or goods at least are getting uh redirected somewhere else. >> You would think so, but you know, so far everything that I've thought would be inflationary for the West and for the United States hasn't shown up yet. You know, my my nightmares all shows up at once. >> Well, no, >> it it's it's funny that, you know, Everybody's celebrating now that tariff revenue is getting ready to go up because all of the pre- tariff rush of stockpile building is now gone. So that's great. It's going to increase tariff revenue, but last time I looked, tariff revenue was a tax that was inflationary. So it's going to be I think the first quarter of next year could be kind of interesting on the macro stuff. So, you think that's the first time they actually start hitting that's the first time they actually start counting because everything up to this point has been pre uh tariff inventory that they've been selling down. >> That's that's part of it. The other part of it is that there's a couple things. A a lot of tariffs were staged in. Okay. B, according to Goldman, and I'll rely on them because they've got guys at the ports counting these things and I don't. Um corporations have been eating over 50% of the costs. 8%. The foreign nations have been to 88%. And that's been the number and it's going to stay the number, I think. Um, but the corporations, if you listen to the calls, they're saying, "Yeah, we ate some. We can't keep doing it because it's killing like Target and Walmart and some of the other people that it's crushing margins." Well, they've got shareholders to answer to. Um, so I think the first quarter could be kind of interesting, you know, b depending on how the Supreme Court decision goes, but um, I don't think we've seen the last of the tariff movie yet. >> What what's the decision before the court whether they >> decision before the court is whether he was allowed to do it or not, >> right? >> And I mean, I know the answer. I'm just not sure how they're going to rule. >> What's the answer? Yes, he's allowed to do it. >> No, I can. No, there's >> if if they vote that he has the authority, they're all going to be suffocated from tying themselves up in knots and we're going to have to get a whole new court. >> I see. >> So, what happens when they say he's not allowed to do it? >> There's the $24 question. None of us know. >> Okay. >> Uh re really that's just going to be massively confusing because technically they've got to give all the money back. Can you imagine why? What are they going to such a mess? >> It's It's g absolutely going to be a mess. And we could do a whole show on this, but we shouldn't. >> I try not to follow too closely. >> No idea. >> I mean, that's >> I love macro and politics, but it doesn't make me any money. And that's it took me a while to come to that conclusion and because I love to talk about the macro stuff and get down to the details and read about it and dig into it and it's fun and I'm from the DC area. I mean my parents were you know work for the government. I cut my teeth on politics. I love politics but it makes me no money. So when I have to sit down here, I mean, I'm EV to EBIT, price to tangible, book value, credit rating, and I can't care about anything else because, if I'm honest, macros cost me more money than it ever made me. >> I >> I wondered before if if like the value factor as a thing has made money because it is just relatively agnostic about anything macro. Like you're almost always buying in the face of something scary macro-wise. >> Yeah. >> Yeah. I I think done correctly, I think that's probably 100% right because you're you're always contrarian. >> Well, that's my thought, too, that you're buying stuff just before it tips over the edge, but it doesn't tip over the edge, it comes back. >> Yeah. And that's one of the reasons I love the small bank area, by the way. It there's a certain idiot proof factor to this. Okay. And to illustrate, after after the crash of 2000, we bought a whole bunch of banks, right? >> Because they were cheap and these were good banks. They were small town banks. They weren't they didn't own any internet stocks. They didn't made any loans to pets.com or any of that. So, great little banks trading literally at half a book. This is party time for a guy like me, right? But then we got a really accelerated uh consolidation wave. So, these things were going out one or two a day. It was it was fun. Um, but as we get up to 2007, two things are happening. One, we're starting to see NPAs creep up in banks with large mortgage books. They go over two, I'm out, right? So, we're selling there. But when we get a takeover and I'm looking around and I've got cash and I need to invest it, there's nothing under book and there's nothing with, you know, the below 2% MPAs. So, I'm literally got cash. If it wasn't for spa arbitrage, I might have starved to death in 2007, you know. >> Yeah. >> The the guy that taught me that, I mean, he's on my Christmas card list forever. >> Tim, uh, we're coming up on time. Um, so give us a the names of your It's Community Bank Investor. >> Yeah, it's just the the community bank investor that was hosted over on Substack. um >> the community >> the community bank stock investor >> and Tim's flagship report >> Tim Melvin's flagship report um yeah we have our own hosting you just Google it it's right there and you know it's subscriptions or we do lots of free content I mean we just finished a uh study this morning that'll go out free to everybody on stocks under five PE ratios that are expected to remain it's pretty cool study by the way it was a lot of fun to do um the draw downs are not for the faint of heart but it's ridiculously profitable. >> Uh, and if folks want to get in contact with you or or follow along with what you're doing, what's the best way to do that? >> You know what? Shoot me an email, guys. Just team elvingmail.com. Um, I I please email me. I love talking about this stuff and I'll get back to you usually within a few hours. >> Good one. Uh, JT, any final words? >> Happy Thanksgiving to everybody in the US. Uh, enjoy your family time. stop thinking about the markets for a little while and give it a break and uh just appreciate the life that you have around you. >> Amen. We'll be back uh next week, same time, and then we'll figure out how many shows we've got left for the end of the year. I think we got a few. >> Um but >> left in us, >> we got a handful left before we collapse at Christmas. >> All right, guys. Tim >> Toby, thank you so much. I really appreciate it. I love coming on. >> Pleasure. Thanks for having you. It's been it's been great. Feedback's been great. And folks, uh happy Thanksgiving. will see it on the flip.
Tim Melvin on Community Banks and Small Caps in Europe, Hong Kong and Japan | S07 E42
Summary
Transcript
I've got the little live stream icon which means I think we're live. This is Value After Hours. I'm Tobias Carl joined as always by my co-host Jake Taylor. He's in London, England. And our special guest today is Tim Melvin. How are you Tim? >> I'm doing fantastic. Uh down here in Greensboro, North Carolina today. Uh just did a high-speed drive across um across the city of Greensboro because I was stuck in a doctor's meeting and I forgot we did this live. So I told we can reschedle. We'll do it at two o'clock. And no, so we made it. So we're here. Thanks for having me. I appreciate it. >> Yeah, good job. Killed three pedestrians and uh >> well, you know, I just my wife just took the keys because she I drive like a Texan. Well, she drove here like a Texan running for the border. So I mean, but we made it. I love it. Tim, um, old friend of mine of ours. We we've talked quite a few times, uh, over the years. Uh, let's talk community banks. You've got a community bank investor newsletter. >> Yeah. And we've been doing that one for a really long time, as you know. It's um, although you you run across other stuff that's interesting. I mean, community banks have been my, you know, greatest love since the early 1990s in the aftermath of the SNL crisis. And we just stayed with it. We've turned it very, you know, very quant in nature. We've I know people that can go on these long esoteric lectures about banks and reserve banking and the sofur effr spread and what's wrong with the banking system and this and the nondepository finan none of it matters all that much. It is a lot of fun to talk about. Okay, especially some of the stuff with non-depository financial institution loans and but if there's a series of numbers and if you get them right you're going to make money. So, >> hit us with those numbers. >> Hit us with the numbers. Real easy. Capital levels. Okay. We want to look at uh equity to assets. We want to look at CT risk based capital. The higher that number is, the better. I'm addicted to converted thrifts. So, you know, over 15 and 20, you know, I will just own that stock and and not part company with it because there's at that point there's the cockroaches, Keith Richards, and that bank left after the apocalypse, right? So, so you want to have that buffer against anything that can go wrong because something's going to go wrong, right? Then the other is non-performing assets, >> right? Right. And what you're looking for here is you're just looking for bad loans, foreclosures that they can't get rid of. You want that number to be as low as possible. I use a cut off of 2%. Which in today's environment might sound a little high because we've gotten spoiled, right? Because they've been so low. Um, but I two's a hard percent off. I God could be running the bank. If he's got an over 2% NPA, I'm out. And I told I told that to John Allison one time who does think he's God of the banking industry. I said, "John, if you ever go to 2% of them, I have to sell you stock." He's like, you know, Johnny's a good old Arkansas boy. He says, "Well, Tim, I don't expect we'll ever get there." I said, "Okay, well, good, but I I'll just stock." But it's that those are the the two key fundamental numbers. Then we're always going to take a peek at um the amount of uninsured deposits. Just paying attention to that number kept you out of Silicon Valley Bank. >> Okay. So, we're going to take a peek at that particular number. But then the only other number that we're really caring about, so if we've got a great loan portfolio and we've got lots of capital, most of this stuff in between doesn't matter that much. Okay? Matters if you're a professor or you want to pontificate. But if your idea was to make money in community bank stocks, then that's really just a lot of talk because everything's going to show up in those two numbers or book value. Okay? If book value is going south, something's wrong. No matter how good the story is, no matter how good the narrative, the stock might look, uh the momentum, whatever it is, all that can be excellent. If book val book value is going south, something's wrong. Okay? So, we want to look for book value that's at least staying stable. And then price to book is everything. You make all your money in small banks when you buy them. And if you get that right, you get a bank with all the other criteria and you can get that thing at 85% of tangible book value. And you know, I stealed the phrase from Marty Whitman, but if you get all the other stuff right and you get the cheap price to book value, tangible book by the way, um it's going to be really hard not to make money. >> So, uh do you do you find these banks have a lot of exposure to? So I I'm not sure entirely sure what the reason Silicon Valley Bank fell over. That was more related to their their asset side. They'd stuck it in treasuries and they'd had more front month treasuries that were very sensitive to the move up in rates. Is that that's what I'm Silicon Valley? >> Yes. But they also had the the uninsured deposits were just these very large nonsticky deposits, right? And they were large deposits over the $250,000 mark to So once they got a whiff of a scare, they were gone, right? because they had no they they had no insurance over that level. Um Silicon Valley Bank's big problem was longdated low coupon bonds. They had put all of their assets into that for the most part and then they had um but >> those are safe. >> Yeah, they are until everybody wants their money back and then you got to take the mark on them. There there was a whole combination of stuff that went on at Silicon Valley Bank that it was never a banking crisis. It was a regulatory crisis because the in the rush to pass new regulation in the aftermath of all that, you know, if you stopped to realize that the regulators on all four banks had completely dropped the ball and just said, "Oh, they own treasuries. We're not going to worry about that." Um, so if you were following just the simple rules, you never got caught in that. And the set of chain was Silicon Valley Bank at one time was a great bank. I can remember back in the 90s thinking I was a super freaking genius because I found this bank that was banking all the tech companies and there were collected warrants and I bought it at 15 and I'm a genius. I sold it at 45 and then I sat there calmly watched it to go to 600. Um but so yeah, if you get those numbers right, you're usually going to avoid most of the other problems uh that are going to come up in the banking sector. People over complicate this. >> What's the >> Is there sorry >> more is there more or less economic sensitivity with the smaller regional banks compared to say like the bigger bigger banks? >> Less I mean the small regional banks I think it's a wonderful life, right? That's kind of what we're going for is the Bailey building. >> Jimmy Stewart. Uh >> yeah. Yeah. So it's they're not they have no loans on large office towers and downtown buildings. And that's been one of the funniest things to sit back and watch over the last couple years. Well, community banks have the mass of exposure to commercial real estate. I'm like, yeah. And I love give me more of this. This is Joe's gas station and Fred's doctor's office, right? and a four-story office tower on the edge of town that's full of accountants and doctors and lawyers and you know local advertising magazines and brokerage agencies and real estate firms. These folks were coming to work when they weren't supposed to. They never had the empty office problem. They never had the vacancy problem. There will be a rollover problem on the loans. That's a fact, right? You've got all this loan that was out there. some of it's going to roll over, the rate will go up. It that's going to be a very easy pass through. And indeed, when you look at commercial real estate loan losses in community banks, they're really low, right? Most of the problems in the banking area that you see, the the commercial real estate office, it's at big banks. It's a big number, but it's a big number on a massive balance sheet. So, I hate to say it doesn't matter, but it doesn't really matter that much. Um, and it's the same with uh today's hot button, right? Non-d depository financial institution loans. That's the bad word. And that's what's lending to private equity funds, to private credit, um to um commercial lenders outside the banking system, fintech lenders, which by the way is code for subprime in a suit. Um and >> this is what you would call the shadow banking system. >> That's the shadow that's the shadow banking. And the shadow banking industry is backed by the banking industry. Okay. Um there may be some problems that show up there, but it's not the first bank of Peoria's problem. It's Jamie Diamond's problem because all of that papers on the the the larger bank sheets for the most part. Community banks taking deposits, they make local loans. One of the things I love that especially I deal in really small banks for the most part, you know, they know the buyer, they know the piece of property, they know who tenants are probably going to be, right? They're very well associated with what's going on here. So, they know the deals not to do and the deals that you can go ahead and maybe bend the rules on a little bit, which gives them kind of some insulation. Um what you'll see in community banks when the economic the economy slows down is those with CNI heavy portfolios commercial and industrial they'll start to feel it right because Rosy's salon has no customers and she can't make payment okay so we will see some of that um but even if you go back to 2008 um when things were blowing up it was only the banks that did stupid things that that got into deep trouble and by the way all crisis were created by banks Every banking crisis is created by bankers doing something stupid, right? If during the the little 2023 banking crisis that really wasn't a banking crisis um where the four banks failed, uh and I forget who it was, but it was a great shot. It was just a shot of a guy from the knees down in khaki slacks and he cuff on the cuffs on the slacks and tassels on the loafers. I just said, "If your banker dresses like this, you don't have anything to worry about. Yeah. >> What's the old joke, Tim, about like uh you know the the small town banker that that won't lend anything no anything further than he could see from the top of the water tower. >> No. Yeah. Exactly. If I can't see from the top of the water tower, I'm not going to make the loan. And uh that is just a tremendous business. And it's not like I I didn't discover this. Okay. People have been doing this for a very long time. And you know, everybody holds up Peter Lynch as the great growth stock investor, right? And I'm not taking anything away from Peter Lynch. He's uh one of the greatest investors of all time. Go back and take his fund returns apart. He owned when he retired right in uh 89 was it? He owned every thrift in the United States because he had a guy that this guy's job was to go around the country and put money in the mutual thrifts so that when they converted, Peter could buy the IPO and hold the stock because that's layup money. uh the rules have changed. It's not as easy, but he owned literally every thrift and if he could get them that met his guidelines, he continued to buy them right up to the day he left because at its core, small town banking can be a very good business. Now, right now, it is a much tougher business than it was back then because regulatory costs are higher. You know, Jamie Diamond spends a billion dollars a month on technology. First Bank of Peoria cannot do that. they have to go out, they have to find the licensing deals and agreements. Um, and it gets very complicated now because when you go out and you acquire technology from a vendor, you're not just responsible for your employers to the regulators. You're now responsible to your vendors to the regulators for your vendors employees behavior. So, it's a regulatory nightmare. The other thing that we're seeing in um community banks is succession. It's a problem, >> right? We had a bunch of banks started in the 80s and 90s, particularly in the 90s after the uh Regal Act was signed by President Clinton. Um these guys are getting old, really old. Um they're older than me, old. Um and they're looking for a door. And nobody graduated Yale this past spring and said, "You know what I'm going to do? I'm going to go to work at a three branch bank in the Midwest." I'm I'm super stoked. Not even the last guy in the class, you know, the NBA class had that top of brain. So succession's a problem now. So all of this >> I'm surprised that's not like there aren't search funds that are trying to do something about that because I mean that sounds maybe more fun and interesting than going and running an HVAC rollup. >> Well, yeah, but you get paid a lot more money to run the HVAC rollup. I mean, you want to have some fun, you have some some fun, go in and pull the 10Ks and look at the salaries these guys are getting. M >> you know a small town banker getting a quarter million bucks that's top dollar you know the the m the smaller regionals 400,000 500,000 and you know dilute the stock with stock options and then go to the shareholders meeting okay uh it's not look I've been to shareholders meetings in the basement of churches with these things okay and it's all the local business people and they know what you did they know who you did it with and they know if you patted your own you pocket a little bit and you're going to pay a price for it. So, but um what this is doing is and delayed, you know, for a few years now, but it's kicking off another wave of acceleration of consolidation. You know, consolidation has been kind of grinding on and then you'll get pickups under the Biden administration and it's I don't care about the politics of it. They did not like banks. They did not like M&A. And when you put the two together, um, they killed deals that they shouldn't have killed. You know, they killed a couple deals where I went through and I looked, I'm like, why did they kill this deal? There's there was no reason. They just could they drug their heels on others. Um, it was very hostile environment for bank and banks and bank M&A. And again, politics aside, this administration is very friendly to banks. They're rolling back regulations. Michelle Bowman, whose family owns a bank in um Council's Bluff um Kansas, Farmers and Dro's Bank, big bank. I'm sure you've all heard of it. You know, that's been around for a long time and it's still only got 200 million assets. She's a community banker, right? She's worked Tellerline. She kind of understands what it means to be a small town banker. So they're they're size fitting the regulation and they're making M&A easier and we're already starting to see it. I think we've had a sudden burst and in the last few months banks we've held for the last couple years we had four of them bought. I think 2006 you're going to see a real acceleration of this. >> Do you want to get bought out or do you just want to earn the the ROE? >> No, I want to get bought out. I'm >> okay. Now look, if you get you get the right buyer, right, then I'll hold the bank for a long time. You know, I I love telling the story about John Allison of Home Bank Shares. Um John, I wrote a bad article about his bank one day. I said stock was really expensive. And John Allison, if you don't know who he is, it's worth reading about him, but he and his partner Bunny Adcock. Okay, so you got Johnny and Bunny bought out a bank with FDIC and assistance back in 1990 in Conway, Arkansas. Okay, small town, small bank, $25 million. Johnny's a really good businessman and he's brilliant guy. So I wrote this article one time at Real Money and I said, "Hey, you know, good bank, but it's almost three times book. That's ridiculous." This man tracked down my phone number and called my cell phone on Saturday morning at 11:00. I pick up the phone. I'm like, "Who the heck?" I got a friend in Conway. I'm like, "Did Chris change his phone number? Let me see who this is." He's like, "Damn, this is John Allison, the CEO of that bank you wrote about yesterday, and I don't think you were very nice to me." But I got some >> That was implied, believe me. But I got to know John and he's a great banker and he does about a deal a year and he's never made a bad deal. If John Allison buys one of my small banks and it's happened a time or two, I keep the home bank shares that I get because it's a great bank. So you make the decision whether you're going to keep the acquiring bank on a case- by case basis. But yeah, I generally speaking, I want to get bought out. Absolutely. I want to get bought out. Um, and you're looking at almost an arbitrage there of 85% or less a tangible book. Deals are currently averaging about one and a half. I will take that spread all day. And where it gets to be magic is if you can get it at 85% of book value and they grow the book at 10% a year. Okay. Then big things start to happen. >> Do you have any names, Tim, that you can take us through just to give us a flavor of what what it's like? >> Let me I had pulled a couple up here. Let me just get back to the portfolio here. Bear with me one second, guys, because as you know, I was running very late coming in here today. There we go. Pull this up here. Could I ask a more meta question before that while you're digging out? >> Abs. Absolutely. You know, if you think about like do young people have a uh you know, because I imagine that they're a little bit more inclined toward digital, a little less wanting to go into the bank locally. Maybe that's less important. Maybe I'm wrong about this, but I'm just imagining a less sticky customer base with the younger generation relative to maybe their parents or their grandparents. Is that >> intuition accurate? >> Not really. Because if you can and SoFi's figuring this part out and we've seen some other bank figure it out if you can meet their needs right in other words don't make them come into the branch offer them the digital services and it's a transition for a lot of bankers but um you have to get the tech right if you get the tech right they'll stay with you now they're not old enough for this to be a definitive statement you know making a you know statement about the longevity of a 25-year-old would be kind of silly at this point in time but it does seem that if who can meet their needs digitally. uh they will stay with you and um I we haven't tested this yet but we will in the next banking crisis that comes along how soon they discover the importance of FDIC insurance although we have actually we've seen a little bit of that at SoFi their deposits went up when they started offering insured accounts right something about Americans we love that FDIC insurance especially small depositors that really don't maybe not understand the banking system and how it all works. They kind of like the feeling that the government's going to back them up if things go wrong and punish the bad guys. So, um I think if you if you meet them digitally, they'll stay with you. However, if you cannot meet them digitally, you do have a problem and that is drive that's actively driving M&A. Okay. Um and you'll also see the usage of AI playing a big role in this going forward too. But let's do some names. Now look and guys, the names I'm about to give you are small banks. Okay? If you use a limit order on any of the banks I'm about to tell you about, your major contribution to the day will be buying lunch for a trading desk at a small brokerage firm somewhere in the Midwest of America. Okay? And it's going to be the best lunch they've had all year. So, um, one of my favorites, and this is a former converted Thrift, uh, Toby. It's the Northshore Trust and Savings Bank. It's now called NSTS Bank Corp. The symbol is NSTS. It's a really small bank. It does not trade a lot on a day-to-day basis, guys. So, please be smart. Use a limit order, >> but in a world where a 10 10 is a high equity to asset ratio, they have a 29. It trades at 70% of tangible book value. Okay, just a super cheap small branch northern Chicago suburbs, former Thrift, you know, trades by appointment from time to time. But you would have to work so hard to lose money in that bank. It's crazy. Two days ago, I would have given you Blue Foundry Bank, but they got bought out. Um, RBB Bank Corp out in LA. Um they are a Korean uh bank. They u do business with the Korean-American community trading at 77% of book value, a three 3% dividend and a 12 equity to asset ratio. So um >> when you see that equity to asset ratio, what when they're when they're more conservative like that, what does that indicate about what they're doing in the business? Why do they tend to run more conservatively? Well, the more a they're more conservative, okay? Uh b in the case of like NSTS or some of the other uh former Thrifts, uh they took in a bunch of cash during the uh Thrift conversion offering. And in a Thrift conversion offering, here's what happens, Toby. We have a hund00 million bank. Okay? We're Thrift. We're own by depositors. We decide to go public. Now, we have a hundred million in assets, right? So, we're going to sell 10 million shares at 10 bucks. That's 100 million. So, at offering closes, what do we have? We have 10 million shares outstanding, but we have 200 million in assets. So, we've sold stock at 10. It's now worth 20, but we bought in just a ton of cash assets, and they tend to just kind of be there. um and they'll just hold them in short-term securities, collect the the money off of that. It is a very conservative approach to banking. It's a very old-fashioned approach to banking. Uh but generally speaking, the banks that hold higher capital ratios are the ones that will not get in trouble when things do go bad. Um, and you know, as Charlie Munger said, you can make a lot more money avoiding stupidity than you can by being the smartest guy in the room. So, and bankers with high capital ratios, really conservative, happy to hold capital. The excessively high ones tend to be former thrifts. >> So, the just uh the RDB, which was the um was it RDB? The Korean American Bank. >> RBB Bank. Yes, >> BBB. >> Yes. >> Yeah. And I'm kind of they're in LA, but they've got branches around the country, and I'm kind of shocked that they have not been purchased yet. Um because there's been a general uh consolidation among some of the more ethnically oriented banks. >> And what's the what's the story with IByond? They're well capitalized. They're >> well well capitalized. They serve the Korean-American business community. I mean that and that is the story, right? That's a really loyal uh b the Chinese American Korean-American banks on the west coast and there's some branches in like Washington DC I believe. Uh they tend to have just this really super loyal ba deposit base. They come to them first for loans. So just a great business but there's been a lot of consolidation in that space. >> Why do they tend to trade cheaply? >> Nobody cares about them. I mean, that's just, you know, bottom bottom line. Um, nobody really cares about them. They see them as completely, if you just do it by the numbers, they're all commercial and industrial and real estate in LA. Real estate in LA causes cancer. We all know that. >> It says it on the door. >> Says it on the door, right? There's a warning. Um, so they're just And all of the ethnic banks are trading very cheaply right now. Uh, they're just out of favor. Nobody's paying attention. They've they're not AI banks. They're not a sexy story. Um, so everybody's just kind of standing the side. >> And what sort of return would you expect absent the takeout in something like RBB? >> Well, I mean, if I can get it's going to trade up the book at some point in time when the banks come back into favor. uh you know if they can continue to earn a you know a double-digit um multiple on uh ROE then I think you know a double- digit compounded return is reasonable to expect over time that doesn't happen overnight >> and so what sort of returns are they getting on equity or assets in something like that >> let's take a look at RBB uh RBB right now is doing a seven on ROE and a very low ROA. This also makes them a very attractive takeout target. Um, and RBB really to me is a takeout target more than anything else. >> Okay. Um, let me give a quick shout out to everybody who's at home. JT JT's just fallen off briefly, so we'll see. He was he would ordinarily give us uh veggies at the top. Yeah, here he he's back. Let me just do uh I'll give a quick shout out JT and then we'll do some uh do some veggies. Uh >> Lousan, Switzerland, what's up? Seron, Cleveland, Toronto, what's GX? Barney main streets of GX. You got to help me out there. Is that Georgia Boisey? So I got a I got an instruction on saying Pikfa and I' I've failed terribly, but Patika, what's up? Valpare, what's up? Kawaii, good for you. Tallahassee, Mter Ray, Mexico, Jupiter, Florida. Sam's already won. Toronto, Lisbbora, Portugal, Fort Collins, Colorado. I think that's it. San Anton. Everybody's taking a break for Thanksgiving. JT, you gonna hit us with the uh veggies and then we'll come back. We're going to talk small caps with Tim. >> Yes, sir. All right. So today I wanted to hit us with a what's new in Michael Bubbison's updated cap allocation paper that came out a few weeks ago. So it's not going to be a full recap. It's just what's changed since the earlier version of it that I think I did a book report on already at one point. So um the big picture is that uh this new data from 2024 and into 2025 makes the story even clearer than it than it was that US corporates right now are cash machines really uh in an intangible heavy world with a lot of option value that's concentrated in a very small set of the the mega caps. So here are seven observations from the white paper. Uh number one uh intangibles are now clearly driving the capital stack. U 2024 US corporate capital deployment was roughly 7.5 trillion dollars. Intangibles which are R&D and investment in the SGNA line items now are uh 13% of sales and are bigger than capex now uh which is is saying something. Uh so the center of gravity in the the capital allocation universe has definitely shifted to the intangible world. Uh number two leverage today is lower than history which might be a bit of a surprise to you uh even after a decade of cheap money. So this is non noninancial corporates debt divided by total capital around 15% today uh versus 26% historically. This has happened, you know, after historically low rates. Um, and so contrary to probably the usual narratives, uh, the US corporate is actually kind of entering the next regime under levered versus history. Uh, long run return on invested capital including intangibles is around 9%. Uh, and that's basically they're generating more cash than they they productively reinvest at this point. Um, so it's it does tend to support these like kind of structurally like higher payout ratios. Excess cash and short-term investments are 7 and a half% of assets up from 5.8%. So half of all the AC excess sits in fewer than 70 companies and a quarter of that is in just 10 companies. So the real capital allocation option kind of in the system is locked inside a very small group of mega caps and their decisions are going to end up moving the whole ecosystem really. Uh so we got to kind of pay attention to that. Number five is the uh the index has obviously flipped to intangible heavy sectors. So IT, healthcare, communication went from 26% of the S&P 500 in 1970 to more than 50% today. Um so now really like the benchmark itself is built on intangible heavy models. Uh capex and R&D growth are effectively a four-firm story. uh the first half of 2025, capex is up 15% year-over-year. 60% of the incremental dollars came from Amazon, Meta, Alphabet, and Microsoft. Uh so this infrastructure buildout is is in AI is very extremely concentrated. So basically, if you you own or you're underweight those four, you're taking very specific capital cycle bets today, one way or the other. Uh I don't know necessarily which one's right, but um working capital is no longer much of a lever that used to be. Networking capital fell from 30% of assets to sub 10% today. So that classic kind of like free up working capital play uh is though that was the in the NBA playbook uh is mostly done for many businesses. There just isn't really much juice left to squeeze out of that that lemon. Um, so summing this all up, more intangibles, less leverage, huge concentration of optionality and capex in a handful of firms. So as an investor really that that forces really a simple question like what game are you actually playing in this world right now? Are you underwriting old school capex stories in an economy that's running, you know, increasingly on code and customer acquisition costs, or are you deliberately betting on a small handful of giants that will hopefully profitably deploy all these cash flows and this cash into a very uncertain AI future. So, you know, with that, I'll let you gentlemen uh place your bets wisely. What do you what do you think um this one one of the series that I tracks is margins for S&P 500 400 600 and they're clearly all of them are close to all-time highs although so they're all all at alltime highs and that Buffett comment and it's it's been echoed by a few different investors I think Janm >> and Husman as well have all said anytime you see profit margins above 6% you're likely to see some mean reversion but the S&P P500 is at like 14 14.9 like plus 14 which is more than two times obviously 6%. Is any of that >> the math checks out? >> Is that uh is that a product of working capital optimization or is that just they can charge higher prices that paying out less on the other side? Anything that you've seen that explains that? Uh I mean you could reference uh James Mete did a piece on this about it was a bit of a miaulpa I think that was even in the title of it. Um like he had predicted being a GMO guy uh that profit margins would mean revert and this was he wrote in like 2012 or something. >> Yeah. Um and then he looked back at it a decade later and um they had not been reverted and if anything they'd gone the other direction and his answer was that um a lot of it had to do with government stimul like running deficits basically uh was kind of one of the primary takeaways as to why that was the case. Uh I think there's also probably a reasonable argument of call it regulatory capture or uh you know lack of antitrust probably. Um there's some pretty cozy comfortable igopolies and monopolies that that exist that are just earning supernormal profits. So who knows I I it's that's a very big complicated system to try to like ascribe to a couple of variables is quite difficult. The monopoly thing is funny though because even in the small caps they're running at historically high margins. >> I think low cost of debt might play a role here too because money has been >> interest expense very low >> really cheap since 2009. I mean it's um I think that probably play plays a role in there. I think >> corporate taxes too low. >> Yes. Thankfully let's let's not do away with that. No mean reversion there guys. Lower is better. >> Well, we'll see. I mean, uh you balance that against the guillotine risk and maybe it's not uh maybe it's not the worst thing in the world. >> Then there's that. >> What What did What did you What did you take away from from the piece, JT? What did What did you What should we be looking at? I told you 120% of my knowledge uh just now in the uh No, I mean I think it's it's um like I said I mean I think it's going to come down to a handful of companies and what do they do with their cash that's going to dictate a lot of the return on capital, a lot of the profit margin numbers because they're just such huge companies. like they just really like they take they make up a ton of the market cap and they take up a they create a lot of the economics that that is uh accounted for in the S&P. So as they go so go with the index and so I don't know I mean when I think about some numbers I've seen where the um by I think starting next year there's going to be what like 500 billion of depreciation flowing through these income statements uh next year. That's not an insignificant number to to mark against your earnings. Um, >> yeah. At some point that stuff kind of has to matter. So, I don't know. We'll find out. There was a there was a paper, I think it's a 2005 paper, something like that, that the investment factor paper where they said that basically you want to avoid companies that have these very high investment making these very high investments because they tend to underperform. The problem is that since that paper came out, that whole relationship has flipped and the the investors are the ones that have outperformed. But the full data set says that the investors underperform. I don't know. I think it's either one. >> It's every data set right now, isn't it? Like >> literally everything it's like, do you want to be right from the last 10 years or the last hundred years because they're polar >> opposite choice. >> That's a choice. >> Yeah. >> Yeah. That's exactly right. It's enough to drive a sane man to off the edge. >> When the going gets tough, the pro the weird turn pro. Is that the >> right that Hunter Thompson? When the going gets tough, the weird turn pro. Yes. >> Uh well, speaking of one area that has been sort of dead and left behind. Let's talk Let's talk small caps. >> Okay. >> What? Let's start with this. What's the attraction of small caps, Tim? >> Uh there's not much. most of you know when you look at small caps you can find bargains and you know this Toby I mean you kind of in the same space uh uh by default using the uh the acquirers multiple you tend to come up with with you know cheaper stocks but right now we're in that phase where the the stuff that you can find keeps going down so um it's it's just that kind of environment at least in US-based stocks >> I will say that that may be turned around at the beginning of November. >> Oh, >> we're measuring we're measuring value in fruitfly lives these days. >> Yeah, >> it's been three Liz trusses. >> It's been it's it's been three weeks of not being waterboarded. >> Yes. Well, I mean, you know, and everything's up today rather nicely, but uh when you look even at small caps in in the US market right now, if you, you know, apply credit filters, you're still not coming up with a ton of names. And as I said, what you do come up with continues to go down. >> Now, where outside of small banks, where I can point and say that's cheap. I want to own a lot of that. Right now it's Europe and Asia. >> In Asia, is it primarily Japan or where do you where are you finding? >> Um actually Hong Kong. >> Tim just did a Hail Mary. >> Yeah. Uh we are uh we we uh we're buying Hong Kong. >> Okay. >> I mean look, I brought Swire Pacific and and I brought it, you know, recommended it, bought it in my own account. SWire Pacific owns uh 82% of Squire's property. That portion that they own of SWire's properties is more than their market cap. They also own 45% of Cafe Airlines. Oh, and you know, most of the Coca-Cola bottles bottlers in Southeast Asia. So, it's reasonably financed. There's a 5% dividend. What's the knock on it? It's in Hong Kong, right? Yeah. And China has been been the quietest bull market, I think, in the history of the world because we're we've all sat around for two years talking about how terrible China is. The property >> even uninvestable. The government's failing. They're not using oil. It's awful. It's terrible. And the stocks just keep going up and up and up and up. And it really hasn't happened in Hong Kong so much. We're playing a little bit of catchup. But god, it's cheap. And I look at the property markets and they're not having the same office vacancy problems and apartment vacancy problems we're here in the United States. They have a PR problem >> because these properties are, you know, they're still kicking off cash. As Hong as China continues to develop, Hong Kong is going to continue to play a bigger role. Um, if you look how close Hong Kong is to the tech centers in China, as the Chinese technology industry develops, it's really good for Hong Kong. Now, that's all the big macro stuff and it's really cool stories. The truth is, I'm buying it because it's too cheap not to buy. >> Yeah, I was just there last week in Hong Kong and it's first time I'd ever been there. I really liked it. the um it's amazing these just like basically if he took New York and put it on an island and or you know like a tropical island and just built it into the side of the mountains. It's like it's pretty incredible, >> right? It had no EPA overlooking the harbor and all. Yeah, they that's Hong Kong right there, man. But but you know things are happening in Hong Kong and they're pretty good and um I just the the closest >> Yeah. the they're so close to the technology centers of uh mainland China that I think that's going to be a big carry through and the fact that you can buy this stuff so cheap get paid a nice dividend and look I didn't put my net worth into it okay and I don't recommend anybody else do but as part of a diversified portfolio of global stocks you know Hong Kong is cheap uh Japan is certainly cheap and you know I I'm going to have some great fun um Thursday at my son-in-law expense because he's an economist and he's been explaining to me all the ins and outs and financial intricacies of why Japan was on the verge of failure for a couple years now and why their banking system and the carry trade and blowing up. It was terrible and awful. And I'm just sitting here going, "Yeah, but they they they doubled and they still traded 80% of books. So, I don't really care about your argument anymore." So, we're still finding some value there. Uh we own European shipping. uh uh AP Mhler Marisk is still sitting there and the stock is ridiculously cheap. Um, and if you just run, and we started doing this, um, over a year ago, just take the old Ben Graham perfect stock rule, right? Under book value, less than a point. 4 debt to equity, current ratio of two or more pays a dividend, and it's crushing US stocks, right? I mean, just makes the MAG seven look sickly uh over the last several years, and they're still cheap. That's a That's a narrative violation. So, >> I'm sorry. You know, my life is a narrative violation, so I'm comfortable with that. >> Why Why are they trading so cheaply? What's >> Because they're Europe, right? It's, you know, the US is now like this massive dominant player on the eur, you know, the global stage, the global economy, global markets. And Europe is seen as these totally one million% incompetent, stumbling, bumbling fools and idiots who get everything wrong. And there are grains of truth in that. Okay? I mean, you if I was going to write a script on how to really screw up your energy policy, right? I would just take government policy from Germany and a couple other nations around Europe and write my movie. um they've made a lot of mistakes, but you got a lot of great businesses in Europe, right? You've got, you know, a lot of 200 year old businesses that have seen it all and done it all and they're still there. And much like California, as much as we point f fingers and go, haha, there's still a lot of people living there and they're buying things and they're buying clothes and they're driving cars. Although in California, I think that's a felony. But um sorry Toby I had to take the shot. Um Europe is still there. It still exists. It's still doing well. It's still got great businesses. They still have warms my heart as an old man. They have a dividend first policy. They like to pay dividends, right? And then you look at what's really happening in Japan where they looked around and said, "Look, you can't keep doing this cross ownership, this little, you know, gentle corporate mafia thing that we've been doing for centuries." You know, I can remember the first time I invested in Japan, it was because Marty Whitman bought all these uh property and casualty companies in Japan. And Marty is one of the smartest guys that ever lived by his own admission. He got lazy at the end, but when he was working, he was, you know, he was killing it. Um, and he thought he was going to go and play activist. That was funny. Now, we all did eventually make money in the stocks, but he thought he could kind of put the squeeze on them. And no, they all owned the majority interest of each other. It was like this impossible thing to unwind and activism. He complained to the government. They went, "Yeah, that's that's nice. What are you doing here, white man? You know, get out of Japan." Um, today they looked around. They said, "We need we're going to need foreign capital to do all these things." So, we have to loosen the restrictions. They the main stock exchange said, "Look, you got a year. Get your price up over book value or we're going to delist you." You know, you got to end your cross ownership. So, now all of a sudden, activists are winning. Elliott actually won an activist campaign, right? This is this is like a huge deal, right? And we're seeing buybacks and all kinds of, you know, 20th century United States markets kind of stuff going on in Japan. And it's really good for the stock market. And you can yet you can still buy these really good businesses, uh, with great balance sheets, by the way, for less than book value. So, I know there's all sorts of double top secret financial stuff going on in the background because my son-in-law goes on and on and on about it. Um, but I don't really care. It's like the um SOF for EFFR rate that everybody was all jacked up about last week. Well, I looked at it and went, "Yeah, okay. That's because of Treasury issuance. Are we done talking about that now?" I mean, it's all great and it's all conspiracy theory and it gets clicks and likes and it doesn't matter that much if I can pay 80% of book value and they don't owe anybody any money and they have good credit and lots of cash. Your prime minister can be the biggest that ever walked. I'm probably still going to make money. So yes, Europe and small banks are kind of really where we're focused right now. >> I've heard that uh rumblings that Korea is like five years, you know, behind Japan at this point as far as sort of that that story of uh corporate governance reshaping um a lot, you know, a lot of heavy balance sheets that could potentially be unwound. >> Yeah. And I and I think we'll eventually get there. And right now you the Korea electric power is cheap. It's been cheap forever, but if you buy it when it looks like North Korea's ready to invade, um I've made money every time they're doing it's like I want to send the guy a Christmas card and say please threaten to invade. You know, I need some cash. >> He's he's your best. >> Yeah. I mean, he's a great indicator. He threatens to invade. Stocks sell off. We buy a little bit. He doesn't invade. It's uh it's the old and it's still one of my all-time favorite market stories is the guys at Tweety Brown. Um Howard Brown went out to lunch one day and I think I forget which one of who was Joe Riley was on the desk and it was um Bay Pig, not Bay Pigs, I'm sorry. Um uh the cre the Cuban missile crisis. All of Wall Street scared to death. Markets are dropping like a stone. The market was already down before the the missile crisis. Things are collapsing now. Tweety Brown is This is old school value, right? They were Ben Graham's broker. They've been around a minute or two. Okay, I'm going to have to call that back. Um, so Howard goes to lunch. He comes back. Joe's at the desk. They're doing they've got everybody's huddled around the little black and white TV where they're predicting the imminent end of the world as the ship comes ever closer. He's calling every broker on Wall Street and he's just buying and buying and buying and buying stocks. Harris says, "What the hell are you doing, Joe? There could be nuclear war. We could all be dead." And Joe said, "That's right. And if there's nuclear war and we're all dead, nobody's going to care. They're not going to be here to care. But if they don't have nuclear war, we're going to make an enormous amount of money." Firm had one of its best years ever. So >> on margin, you might never have to pay it back. >> Right. Exactly. Yeah, exactly. >> So that and that's, you know, Korea's been like that for a long time. Every time there's an invasion risk, it sells off and you can make some money there. But they are well behind Japan and in making big corporate governance changes. They still have a lot of the interlocking going on. >> That um the carriage trade thing that's not is that a risk to the Japanese stock market or is that a risk to the American stock market? >> I think it's a risk to the I think it's a risk to every other developed market in the world more so than Japan. That's not the way the story is being told, but um yeah, because the idea was you borrowed the cheap money there and then you bought stuff somewhere else. So um >> and their rates have been rising. Their rates are the highest that they've been in 20 or something. 20 >> way over Yeah. over 30 years now. It's been a long time since rates were this high in Japan. Um but it doesn't seem to be impacting um Japanese stocks at all. I mean had had went down one day last week, but so did everything else on the planet. Um, >> anything in America, Tim, that you find interesting outside of the banks? >> Uh, I mean, not not that I'm like, you know, aggressively committed to at this point in time. We did buy some of the uh Amry spin-off AMRZ. Um, it's building supplies and materials, aggregates, concrete, asphalt. It's going to be a lot of building in this country. Um, a lot. Uh we are going to be building the data centers. We're going to be, you know, look, you get to write off manufacturing facilities and factories um under the big beautiful disaster. Oh, uh Bill, I'm sorry. Um so you've got that construction, you've got reshoring of factories. There's a lot of homes that have to be built. We're millions of homes short. Um and that's going to use a lot of building materials. This thing gets spun off by a Swiss company, by the way. Nobody cares about it. Nobody understands it. It's a great business that has done nothing but drop since the spin-off. >> So, we bought a little bit of that. Um, let me just pull up the actual sheets here so I can talk from a position of authority. We bought Goodyear Tire and Rubber actually uh with the $2 billion uh capital infusion from asset sales and the fact that they make their most of their tires in the United States and are puts them in a very good competitive position against uh most other tire companies bought some of that uh before that began its runup. Um if >> and EVs are not a threat to tire companies. If anything, EVs chew tires. >> Yeah, that's what I've heard. you know, and I'm not, you know, I'm not a big tire uh expert, but Goodyear is an old American company. They were doing everything right is trying to undo the mistakes of the past. Um, it's it's hard for me to find a lot that I want to, you know, be really super aggressive about in the United States right now because the indexes are at ridiculous levels. And I don't care how you cut or measure that when a 40 cape ratio is a 40k ratio. And when I look at credit spreads, they're about as tight as they've been. They've weakened up a little bit, but that's a lethal combination. And you go back through history and you find sub 3% high yield credit spreads and a cape ratio say of over 30. I mean, that's lethal. So, I'm being very cautious and it's got to be super cheap. You know, we we bought CarMax when it imploded just because I love CarMax. What were the other times when you had a tight spread and a high cape? >> 2000 >> 1999 um and you can't go too much further back because you didn't really have a high yield uh high yield credit spread that was measurable before then. But 2007 you got into the same situation and 2019 you got into a very similar situation. So, and it's look, it's not a you must act immediately right now. The market's going to drop tomorrow, but it's screaming something about forward returns and the guys, I I'm not sure what this is, but it's a doctor's office. I think I have to take it. Give me two seconds. >> Emergency. Uh JT, we would tell us a little bit about uh your uh your >> your trip to Hong Kong. What are your learnings of Hong Kong benefit glorious nation of value for us? >> Yeah, did a little Asia swing of uh Tokyo, Hong Kong, and then Shanghai. And um generally speaking, it's kind of similar to our trip earlier this year that we did together where you just come away from it thinking, gosh, there's so much commerce happening on this side of the planet. And um that when you're living on the other side, you just sort of take a little bit or you're just a little blind to um chi Chinese people really want to work hard, try to get ahead, make make money. Um >> 996 >> build businesses. Yeah, it's as 996 as ever. Uh it's just really impressive. >> They're they're working quite quite hard there. >> Sorry, I had to step away for a minute there, guys. >> No problem. Yeah, I only caught part of the Asian thing, but I did um Henry McVey and his team at KKR. They're really good on macro, by the way. If you're only really one macro guy, it for me it might be him. Um and one of their major themes is um interasian commerce. They see it as huge because of the ongoing arguments between the between the United States and China on trade. They're doing more and more business between themselves and amongst themselves and they they see it as like a really high return investable area. >> That's interesting. Yeah, you can kind of imagine that. I mean, if the supply chains do a little reconfiguring, >> who are the big beneficiaries out of that? >> Vietnam, >> Singapore. >> Viet Vietnam, Singapore to be sure. And I'm still doing some work on that. I haven't got anywhere near as far along as I'd like to be. So, but um just >> got to be inflationary for for the west, right? Because you just like those cheap goods and services or or goods at least are getting uh redirected somewhere else. >> You would think so, but you know, so far everything that I've thought would be inflationary for the West and for the United States hasn't shown up yet. You know, my my nightmares all shows up at once. >> Well, no, >> it it's it's funny that, you know, Everybody's celebrating now that tariff revenue is getting ready to go up because all of the pre- tariff rush of stockpile building is now gone. So that's great. It's going to increase tariff revenue, but last time I looked, tariff revenue was a tax that was inflationary. So it's going to be I think the first quarter of next year could be kind of interesting on the macro stuff. So, you think that's the first time they actually start hitting that's the first time they actually start counting because everything up to this point has been pre uh tariff inventory that they've been selling down. >> That's that's part of it. The other part of it is that there's a couple things. A a lot of tariffs were staged in. Okay. B, according to Goldman, and I'll rely on them because they've got guys at the ports counting these things and I don't. Um corporations have been eating over 50% of the costs. 8%. The foreign nations have been to 88%. And that's been the number and it's going to stay the number, I think. Um, but the corporations, if you listen to the calls, they're saying, "Yeah, we ate some. We can't keep doing it because it's killing like Target and Walmart and some of the other people that it's crushing margins." Well, they've got shareholders to answer to. Um, so I think the first quarter could be kind of interesting, you know, b depending on how the Supreme Court decision goes, but um, I don't think we've seen the last of the tariff movie yet. >> What what's the decision before the court whether they >> decision before the court is whether he was allowed to do it or not, >> right? >> And I mean, I know the answer. I'm just not sure how they're going to rule. >> What's the answer? Yes, he's allowed to do it. >> No, I can. No, there's >> if if they vote that he has the authority, they're all going to be suffocated from tying themselves up in knots and we're going to have to get a whole new court. >> I see. >> So, what happens when they say he's not allowed to do it? >> There's the $24 question. None of us know. >> Okay. >> Uh re really that's just going to be massively confusing because technically they've got to give all the money back. Can you imagine why? What are they going to such a mess? >> It's It's g absolutely going to be a mess. And we could do a whole show on this, but we shouldn't. >> I try not to follow too closely. >> No idea. >> I mean, that's >> I love macro and politics, but it doesn't make me any money. And that's it took me a while to come to that conclusion and because I love to talk about the macro stuff and get down to the details and read about it and dig into it and it's fun and I'm from the DC area. I mean my parents were you know work for the government. I cut my teeth on politics. I love politics but it makes me no money. So when I have to sit down here, I mean, I'm EV to EBIT, price to tangible, book value, credit rating, and I can't care about anything else because, if I'm honest, macros cost me more money than it ever made me. >> I >> I wondered before if if like the value factor as a thing has made money because it is just relatively agnostic about anything macro. Like you're almost always buying in the face of something scary macro-wise. >> Yeah. >> Yeah. I I think done correctly, I think that's probably 100% right because you're you're always contrarian. >> Well, that's my thought, too, that you're buying stuff just before it tips over the edge, but it doesn't tip over the edge, it comes back. >> Yeah. And that's one of the reasons I love the small bank area, by the way. It there's a certain idiot proof factor to this. Okay. And to illustrate, after after the crash of 2000, we bought a whole bunch of banks, right? >> Because they were cheap and these were good banks. They were small town banks. They weren't they didn't own any internet stocks. They didn't made any loans to pets.com or any of that. So, great little banks trading literally at half a book. This is party time for a guy like me, right? But then we got a really accelerated uh consolidation wave. So, these things were going out one or two a day. It was it was fun. Um, but as we get up to 2007, two things are happening. One, we're starting to see NPAs creep up in banks with large mortgage books. They go over two, I'm out, right? So, we're selling there. But when we get a takeover and I'm looking around and I've got cash and I need to invest it, there's nothing under book and there's nothing with, you know, the below 2% MPAs. So, I'm literally got cash. If it wasn't for spa arbitrage, I might have starved to death in 2007, you know. >> Yeah. >> The the guy that taught me that, I mean, he's on my Christmas card list forever. >> Tim, uh, we're coming up on time. Um, so give us a the names of your It's Community Bank Investor. >> Yeah, it's just the the community bank investor that was hosted over on Substack. um >> the community >> the community bank stock investor >> and Tim's flagship report >> Tim Melvin's flagship report um yeah we have our own hosting you just Google it it's right there and you know it's subscriptions or we do lots of free content I mean we just finished a uh study this morning that'll go out free to everybody on stocks under five PE ratios that are expected to remain it's pretty cool study by the way it was a lot of fun to do um the draw downs are not for the faint of heart but it's ridiculously profitable. >> Uh, and if folks want to get in contact with you or or follow along with what you're doing, what's the best way to do that? >> You know what? Shoot me an email, guys. Just team elvingmail.com. Um, I I please email me. I love talking about this stuff and I'll get back to you usually within a few hours. >> Good one. Uh, JT, any final words? >> Happy Thanksgiving to everybody in the US. Uh, enjoy your family time. stop thinking about the markets for a little while and give it a break and uh just appreciate the life that you have around you. >> Amen. We'll be back uh next week, same time, and then we'll figure out how many shows we've got left for the end of the year. I think we got a few. >> Um but >> left in us, >> we got a handful left before we collapse at Christmas. >> All right, guys. Tim >> Toby, thank you so much. I really appreciate it. I love coming on. >> Pleasure. Thanks for having you. It's been it's been great. Feedback's been great. And folks, uh happy Thanksgiving. will see it on the flip.