This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Watching Capitol Federal Like a Jayhawk

Updated from Friday, June 20.

Sunday, The Financial Times reported that Goldman Sachs (GS) is expected to pare up to 10% of workers in a division that handles mergers and acquisition advice and corporate fundraising over the course of the year.

Today, according to a Reuters report, Goldman Sachs downgraded the U.S. financial sector to " underweight."

So are there any bright spots in the financial sector?

KU Stock-Pickers Find a Trend-Bucking Bank

" How KU Stock-Pickers Play Offense" introduced you to Professor Catherine Shenoy and the $1.4 million student-run Applied Portfolio Management investment fund at the University of Kansas ("KU") School of Business.

TheStreet.com recently caught up with Shenoy to find out how the APM fund has fared during these turbulent market times and to get her take on the state of the financial sector.

The following interview includes one of the few banks that is delivering for shareholders, with a year-to-date gain of almost 25%.

TheStreet.com: The APM class passed on the many of the most well-known companies in the financial sector long before the high-profile meltdowns and shakeups. Why? And what can an incoming APM student or beginning individual investor learn from how your class analyzed the sector and its companies?

Shenoy: Any APM student or investor needs to understand the balance sheet of a financial company. Until it is clear that the credit markets have "cleared" and transactions can take place based on the values on the balance sheets, we probably wouldn't be able to "get close" enough to understand where the values are.

Going forward, the earnings streams may look very different. If the big banks can't boost earnings by using lots of leverage, then we need a new model for large financial institutions.

TheStreet.com: What is your current take on the financial sector?

Shenoy: Still cloudy.

TheStreet.com: That said, one of the APM fund's current holdings is Capitol Federal Financial (CFFN).

Shenoy: We've actually held Capitol Federal since late 2002. During the later part of the mortgage boom it was hard to own the stock because they didn't do well.

TheStreet.com: Why?

Shenoy: They didn't lower credit standards and lost quite a bit of business. Now they look great. Year-to-date, shares of Capitol Federal are up almost 25%, while the Financial Select Sector SPDR exchange-traded fund (XLF) is down over 26%.

TheStreet.com: Per the fundamental investment questions in your book Applied Portfolio Management, how does Capitol Federal make money?

Shenoy: CapFed is primarily a residential lender in the northeastern part of Kansas. They have high credit lending standards and one of the highest efficiency ratios of all lenders. Capitol Federal has almost no "bad" loans. "Non-performing" assets to total assets equal 0.12%.

Capitol Federal is also well capitalized.

TheStreet.com: What numbers from Capitol Federal's public information demonstrate how well the business is performing?

Shenoy: A misleading number for CapFed is the P/E ratio. Since they are a mutual holding company MHC , they have public shares and shares held by the MHC. They do not pay dividends on the MHC shares and have stated that they have no plans to do a "second step conversion" -- sell the MHC shares to the public -- until they need to raise cash.

Earnings per share numbers are based on the full share count -- public and those held by the MHC. GAAP EPS in 2007 was $0.44, if you adjust for just the public shares, you'd get $1.46. See table 4.1 from the book. I added 2007.

Capitol Federal Financial's Important Numbers
2005 2006 2007
Interest and Dividend Income ($M) 156 127 106
Net Income ($M) 65 48 33
Dividend per Public Share 2.3 2.09 2.09
Shares outstanding (Millions) 74.3 74 74.2
Public Shares (Millions) 20.5 20.4 22.1
Earnings per share - reported 0.9 0.66 0.44
Earnings per share - adjusted 3.17 2.35 1.46
P/E - reported 36.6 58.7 70.4
P/E - adjusted 10.4 16.5 21
Dividend Yield 5.90% 6.20% 6.70%
Stock Price - Year End 32.94 38.42 31

For the first six months of fiscal year 2008, reported on March 31, 2008. CapFed has unadjusted EPS of $0.29 or $0.94 per public share. At that "run rate," we've got an adjusted P/E of around 21. Higher than the past few years, but it reflects the value that is perceived by investors.

The dividend yield is around 5% and could be much higher. At the end of the year, if earnings are good, the company declares a special dividend to return any extra earnings to shareholders.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs