Saturday, September 6, 2008

The problem with blogging: WestAmerica Bancorp

One of my early posts was on WestAmerica Bancorp. It’s a smallish – and traditionally very well run bank in the Central Valley.

It didn’t grow into the mortgage mess – and if you look geographically at its exposures it seemed to do better than average.

Some parts of the central valley are much uglier than in my original post (see Merced). Some are not.

In my original post my case against WestAmerica came down to a few things:

  • Price – it is very expensive by any reasonable comparable
  • It has zero growth – indeed was slowly shrinking
  • It had a large securities portfolio that produced low quality earnings

I was not down on this company. I thought it well managed – but was inevitably suffering a little – as much as anything because rampaging competitors were happy to steal its term deposit base by increasing the price they will pay. I was down on the stock…

Well the low quality earnings in the securities portfolio has begun to cause problems. The bank owns a pile of GSE preferred stock – which it has taken some losses on and which it will probably take more losses on. But this is inconvenient rather than threatening. It might derail the buy-back and indeed the buyback rate is not rapid.

Since I wrote the original article the short interest in the stock has gone from under 5% to 20%. It’s a darn crowded trade for a bank that nobody much had ever heard of. A fair bit of that increase in short interest I can attribute to my blog readership. I have certainly got the odd email. I suspect a 20% short interest in this little and not liquid financial tells you that the shorts are getting too aggressive here. I have removed my short for a small profit. I just don’t like the trade being that crowded. It means when the stock pops it might pop irrationally hard.

The short case is pretty strong – but I have been in crowded shorts before and I don’t like it. To the extent that my blog made the short more crowded I regret my posting. It makes it harder for me to profit from what is just a difficult overpriced situation.

And a 20% short in this company – something that is merely expensive – suggests that too many hedge funds are partying like it is 2006 in reverse. Short first – ask questions later.

I am not going to get long this. The short case is fundamentally right – it is just that the short is crowded.

But getting long crowded shorts when the shorts are wrong is absolutely delightful. Ambac anyone?

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