Idea Brunch with Nate Tobik of Oddball Stocks

Welcome to Sunday’s Idea Brunch, your interview series with underfollowed investors and emerging managers. We are very excited to interview Nate Tobik!

Nate is the author of Oddball Stocks, a blog about unusual securities, microcaps, banks, and deep value situations he launched in September 2010. From 2008 to 2017 Nate was a consultant at Summa Technologies, a consulting firm. Nate also authored The Bank Investor's Handbook and in 2013 founded CompleteBankData, a market intelligence platform for banks.

(Last time we interviewed Nat Stewart of N.A.S. Capital, and our next interview comes out Sunday, October 2. And if you know any great investors we should interview please hit reply and let us know!)

Nate, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background, your passion for “oddball” stocks, and why you decided to launch CompleteBankData?

I’d like to think that I had a master plan for everything I did, but in reality it is more of a “life takes you where it wants to go” type situation.

Leading up to the financial crisis I was investing heavily in spin-off situations.  I’d read a lot about value investing, but at the time (much like now) the landscape for traditional value investments just didn’t exist.  I liked the idea of buying a dollar for fifty cents, but those sort of deals weren’t around, and it was much easier to hitch a ride on a spin-off rocket.

During the Great Recession the types of value stocks I had read about started to appear.  The problem was in many cases I didn’t want to buy a company that was a coin flip on whether it’d be bankrupt or successful depending on a debt raise.  Like now, a lot of deep-value investments were garbage.

I somehow stumbled on Walker’s Manual of Unlisted stocks.  This book profiled a lot of quasi-public companies.  The last time the book was published was in 2003, which for me in 2011 was fine, but it’s woefully out of date now.  The book had a snapshot of financials along with a small blurb about what the company did.  What captivated me was the idea of the treasure hunt.  That there were little companies out there that you could buy shares of that were not money pits.  From there I started to learn that there were many other areas of the market that were similar, such as European small caps, Japanese net-net stocks, mutual companies, etc.

Around the same time, a friend turned me onto the idea of looking at banks.  Outside of a few investments in money-center banks, I had mostly avoided them.  My friend mentioned that there were a lot of sound banks selling for 50% of book value and a few times earnings.  These were the types of investments one reads about in value investing books and here they were for the taking.

The biggest issue most investors have with bank stocks is they are worried about portfolio risk.  This was especially true after the Great Recession.  I hedged this by purchasing a wide number of bank stocks.  Maybe I was lucky, maybe I was good, or maybe my timing was just right.  I don’t know, and frankly don’t care much either, the trade worked out well.

While researching bank stocks the thing that frustrated me the most was that I didn’t have an easy way to screen across the 1,000+ (at the time) traded banks.  The tools that were available were for professionals and were expensive.  I set out to change that through a simple software platform.

A friend and I developed a platform to screen and research banks.  We had modest success selling this to hedge funds and investors.

Things changed when in 2016 a bank approached us about using our platform to build a market intelligence tool for them to use.  What they wanted seemed impossible, but we took on the task.  In start-up parlance, we pivoted the business.

We finished and launched what is now CompleteBankData in 2017.  What we do is collect, aggregate, and normalize data from a few dozen different sources — sources as wide as property data, mortgage data, demographic data, personal credit details, business profiles and lien info to build out a complete picture of what a market and prospects within a market look like for our customers.

Customers use the tools to understand who is in their market, how they are lending, and then build a strategic plan and measure their execution.

It’s really amazing to look back on where things started to where I am now.  One thing that’s stayed true is I am always willing to investigate new opportunities.  Everything I am doing now is a byproduct of something I had an interest in earlier or was learning about.  All of those experiences plus research percolated around and spawned some of the ideas we’ve had.  I am happy to say no to things, but never right away, only after investigation.  You never know what ideas an article or conversation will spawn.

You know the small-cap banking sector extremely well. What advice would you give an investor about investing in small-cap banks? What are the necessary ingredients for success in small-cap bank investing?

Banks are in a very unique place right now.  It is goldilocks for banking.  Customers are not demanding high rates on their deposits, yet lending rates are higher than we’ve seen over the past few years AND demand for loans hasn’t slowed.

All of this together means that banks are entering into a period of extraordinary profits.

The looming shadow is that a lot of smaller banks with excess cash that they couldn’t effectively lend over the past few years bought into bonds at exactly the wrong time.  Once rates jumped the majority of these banks had to record a loss under “Other Comprehensive Income” and the corresponding cut to their equity.

When I think of a successful bank I think of a banker who is attuned to what needs their customers have and is able to build a profitable product around those needs.  At face value, this statement seems almost meaningless, but let me expand.  What makes a bank great is one that discovers a niche and specializes in it.  The best banks are focused on verticals, industry segments, or size.  The worst banks are ones that don’t know what they specialize in so they make every loan that walks in the door.

An example of a bank that specializes is CBB Bancorp (OTC: CBBI — $118 million).  The bank specializes in lending to Korean-American businesses.  What this means is they can get to know their market extremely well, know which players to avoid, and most importantly forecast growth.  If you know the size of your market and know how well your lenders can sell, you can determine how you’ll grow and what the demand for your product is.

When a bank doesn’t know this, they tend to rest on their reputation.  For most banks reputation is enough to drive business.  It really is as simple as existing for 100+ years to drive new accounts.  But what it also means is management doesn’t know their markets or where growth will come from.  When management is saddled with additional deposits they will invest them in whatever makes a return, such as bonds at the top of the market.  If you’re looking at a bank with substantial book value losses then it’s probably a bank with management that doesn’t know what to focus on.  I’d continue to look for a different stock to purchase.