Tom Brown’s Top Financial Picks

Tom Brown founded Second Curve Capital in 2000. The New York based hedge fund invests exclusively in the financial sector. Prior to founding Second Curve, Brown was working for Julian Robertson. He was in charge of the North American financial services group at Tiger Management. Brown has also worked as a banking analyst for many years and has won various awards. Under Brown’s management, Second Curve returned an average of 20% annually, net of fees, since inception, versus about 4% for the S&P financials index.

Thomas Brown

In this article, we are going to discuss in detail a few positions in Brown’s latest 13F portfolio and decide whether it makes sense for investors to follow his investments.

Brown has a tilt towards small-cap stocks. All companies in his latest portfolio have market caps of below $2 billion. The only two positions in his 13F portfolio at the end of 2011 with a $1+ billion market cap are Synovus Financial Corp (SNV) and Sterling Financial Corp (STSA).

Brown increased his SNV stakes by 30% over the fourth quarter last year. As of December 31, 2011, his fund had over $6 million invested in this position. Some other hedge fund managers were also bullish about SNV. At the end of 2011, there were 19 hedge funds with SNV positions in their 13F portfolios. Ken Griffin’s Citadel Investment Group more than doubled its SNV stakes over the fourth quarter. It had $34 million invested in SNV at the end of last year. Bill Miller’s Legg Mason Capital Management and Glenn Russell Dubin’s Highbridge Capital Management also both had over $10 million invested in SNV.

SNV’s revenue for the fourth quarter of 2011 fell by 11.9% compared with the same quarter a year ago. But the declining revenue did not hurt SNV’s bottom line as its earnings are improving. The company reported net income of $27.36 million for the fourth quarter of last year, versus a net loss of $165.57 million for the same period in 2010. Its fourth-quarter 2011 EPS was $0.01, higher than the -$0.23 a year earlier. SNV has a high level of nonperforming loans and relatively small allowance coverage for such loans. The nonperforming loans account for 4.21% of the total loans of the company, higher than its peers. But the allowance for loan losses was $536.5 million at the end of 2011, only 63.4% of nonperforming loans, lower than peers. On the other hand, the credit quality of SNV is improving. It has lower net charge-offs in the fourth quarter of 2011 and its new nonperforming loans are also declining. The company also has high capital levels, which we believe are sufficient to cover possible future losses. The company’s average deposit rate is 0.82% for the fourth quarter, more than the average of its peers. SNV is expected to make $0.10 per share in 2012 and $0.19 per share in 2013. Analysts also expect SNV’s earnings to grow at 8.75% per year in the next couple of years. So, SNV’s P/E ratio for 2013 is 10.42, versus 10.63 for another Mid-Atlantic bank BB&T Corporation (BBT).

Sterling Financial Corp (STSA) is another financial stock with relatively large market cap in Brown’s latest portfolio. Brown had $6.3 million invested in this position at the end of 2011. A few other hedge funds also held STSA. For instance, Jim Simons’ Renaissance Technologies and Israel Englander’s Millennium Management both opened new STSA positions during the fourth quarter. STSA reported strong earnings growth for the fourth quarter of 2011. It made $0.63 per share during the recent quarter, versus a loss for the same quarter a year earlier. STSA also demonstrated a pattern of positive EPS growth over the past couple of years and we believe this growth trend will continue in the future. STSA is expected to make $1.44 per share in 2012 and its earnings are expected to be $1.55 per share in 2013. STSA’s forward P/E ratio is about 14. The number is relatively low compared with the market, but we still like mega-cap financial stocks which have much lower forward P/E ratios. For example, Wells Fargo & Co (WFC) has a forward P/E ratio of about 10 and Bank of America Corp (BAC)’s forward P/E ratio is around 11. Just a few months ago Bank of America’s forward P/E ratio was less than 7.

Tom Brown has a strong track record but we believe this is the time to buy large-cap financials that are still trading at attractive forward P/E ratios.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!