Buying on dips, or Why does this darn stock keep going down?

There are two stocks in my Income Portfolio for this site that have me completely baffled. Their stock prices continue to erode and I am at a loss to find a good reason. These two point out some of the challenges of investing in smaller cap stocks where often the only news available is the quarterly earnings report and the investor has to live with the share price swings for the 3 months in between without much information to decide whether to hold or sell or buy more. Compare this with a popular stock like Apple (AAPL) where I count 15 news headlines at Yahoo Finance for today alone (and it is still relatively early). One of my goals and challenges here is to try to find those companies and stocks where the lack of news leads to an undervalued stock. So as these stocks start to fall in price, the new challenge is are they more undervalued or is there a hidden problem?

First, up I will discuss City Bank [[ctbk]] of Lynnwood. WA. This mid sized ($1.3 billion in assets) bank has 30+ years of conservative management and growing profitability. It pays a quarterly 15¢ dividend which gives a yield of over 4% at the current share price and has recently paid an additional $1.00 dividend at year end. City Bank is an industry leader by most of the metrics banks are measured by. Earnings per share were $2.62 in 2007 and current estimates have 2008 earnings at $2.25. This puts the PE for 2008 at 6.3 based on today’s (still falling price).

I first reviewed and added City Bank to the tracking portfolio here in October, 2007 when the price was about $23. I was looking for a banking sector stock that was down trodden by the market distrust of financials, but was stable and profitable. I though CTBK was a good fit for what I wanted. Since then (before this recent downturn) the stock varied between $18 and $24, based on how the market was feeling about banks and has paid $1.30 in dividends. I made my initial, personal purchases in the $21 range. CTBK started the 2nd quarter at almost $24 and has been sliding downward since. I picked up some additional shares at $18 and have watched the stock continue downward to about $14 today. In the last 2 months the only news were 1st quarter earnings report and a 2nd quarter dividend announcement.

So now my stock is down 1/3 and I scour the news daily for reasons: Nada. I check Seattle area news to check if there is an economic change there: Still appears relatively strong. My only guesses on the price meltdown are that City Bank’s large portfolio in construction loans is in big trouble, and we will not find out until the next earnings report or the many individual share holders (very little institutional ownership) are bailing out as the stock continues to fall. At this point, I plan to hold my position until actual financial results are revealed.

My other falling stock that I do not understand is Aircastle Ltd. [[ayr]]. I have expounded enough for today, so check back tomorrow or Monday for my thoughts on Aircastle.

Note: I have long positions in CTBK and AYR.

Posted in Categories: Contributor, External Research, Stocks.

Subscribe by RSS Subscribe by Email