Bernie Sanders is making quite a splash on the political scene as he tries to win the Democratic Party’s nomination for President. Vermont is a unique place and is reflected by Bernie’s willingness to tell people, “I am a socialist.” For years I have referred to Vermont as the “Socialistic Republic of Vermont”. The state’s economic environment reflects this socialistic mindset as it is very unfriendly to big business. I think this environment has created somewhat of an “economic moat” for the state’s local banks as it keeps the larger banks out and lessens competition. During the first quarter, in our Intrinsic Value Equity strategy, we purchased shares in Merchants Bancshares—Vermont’s largest bank. (Note: We purchased Merchants Bancshares in our Dividend Growth and Income strategy in the fourth quarter.)


There are two reasons why we like Merchants Bancshares. First, the bank is extremely well run. The bank went through the 2008-09 Financial Crisis without any problems.

(This cannot be said for about 75 percent of the country’s banks.) To illustrate this point, the table below compares Merchants Bancshares’ performance during the 2008-09 Financial Crisis to the four largest U.S. banks. Merchants Bancshares’ return on equity (ROE) was 15.1 percent during the Financial Crisis and well above the four largest banks. Merchants Bancshares did not have any significant write-offs during the Financial Crisis and saw a change in its intrinsic value plus dividends of 27.7 percent. The four largest banks experienced significant write-offs during the Financial Crisis, and the change in their intrinsic values plus dividends were negative—ranging between –20.1 percent and –79.5 percent. Over the longer term Merchants Bancshares has been very well run too. This is evident by the fact that over the past 15 years Merchants Bancshares intrinsic value growth plus dividends have averaged 15.3 percent per year and has been positive every year. Its growth consistency of 100 percent of the past 15 years is better than any of the four largest U.S. banks.


The second reason why we like Merchants Bancshares is that we think the shares are undervalued and we were able to purchase the stock at 70 percent of our estimated intrinsic value. The chart on the bottom of page two compares Merchants Bancshares stock price against our estimated intrinsic value for the past 20 years. Notice how its stock price has tracked its estimated intrinsic value during this time. We think it is likely the stock price will drift up towards its underlying intrinsic value and give us a very good opportunity to generate a double digit annualized total return over the next five to 10 years.


The above post has been excerpted from a recent letter of Granite Value Capital.

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