Passing on Alliance Resources and Regional Banks

For the most part, I only like to highlight stocks that meet all of the stringent criteria to earn a "green dot" approval and a spot on our Watch List.

However, I think it can also be constructive, from time-to-time, to briefly discuss some Green Screen stocks that were reviewed and did not make the cut.

Today, we cross out a number of companies from the screens. That's not because these are bad companies, necessarily, but because they are relying on unpredictable, likely short-term, outside forces to drive their current growth metrics. These forces could last a while, or they could turn sharply in the other direction. This unpredictability creates too much business risk to consider an investment.

Alliance Resource Partners (ARLP)

Alliance Resource gets rejected for the same reason CONSOL Energy was discarded. This is a coal mining operation, the 5th largest in the U.S., and slightly larger than CONSOL. The company operates 7 mines, mostly in the Indiana/Illinois/Kentucky convergence area, but also a couple in the Appalachians.

As mentioned in the other write-up, coal prices have soared this year, more than doubling in price from an already-elevated 2021. At over $400/ton right now, that's over 4 times what it traded for through most of the last decade! The main culprit on the demand side is the Russia/Ukraine war, which has limited supplies of natural gas, increasing demand for coal. On the supply side, over a decade of anti-coal energy policy has crimped supply. It's a perfect recipe for a soaring commodity price. The question is, will it last? The answer here is - I have no idea, but it seems unlikely! Does anyone really think coal is the future of energy? A lot of investors have gotten burned buying commodity stocks at short-term peaks. That won't be us.... ARLP is a pass.

The Regional Banks

There are a striking number of regional banks showing up in the Green Screens lately. Regional banking has always been a pretty good business. These firms are usually conservatively capitalized, relying mainly on cash deposits, and careful with lending practices. Personal and small business banking is a sticky business too. It is cumbersome to switch banking providers and few do it without a serious catalyst.

However, rapid growth is not what this cohort is known for. This is a modest growth industry, with deposit and loan volume increases more in the range of 2-3% annually. Some banks augment that with acquisitions from time-to-time. By no means is it a growth industry.

So what gives? Why are so many banks showing up in a growth-oriented screen?

Similar to coal, the biggest catalyst are rising interest rates. 30 year mortgage rates began the year at 3.05%, but today have more than doubled to 6.49%. The story is similar for other loan types. At the same time, rates on deposits continue to be laughably low. CDs still earn well under 0.4%. Those paid over 10% back in the 1980's!

This creates a wonderful gap that should lead to solid net interest growth for all banks over the next year or 2. It's another situation that might last for a while, or might not. While higher interest rates create a revenue tailwind, there are also risks. Higher rates are going to almost certainly depress new loan volume, bringing down origination fee revenue. Also, higher rate loans default more frequently than lower rate loans.

We are not looking to buy companies relying on unpredictable, outside forces to drive their growth. We are looking for strong ORGANIC growth, driven by secular industry trends and a company's operational success in exploiting them. High interest rates (and coal prices) are likely to be shorter-term phenomenon that could reverse without warning. For that reason, I'm rejecting the regional banks in the screens from consideration. The current ones are listed below - there are a bunch!

Cathay General (CATY)
Cullen/Frost Bankers (CFR)
City Holding (CHCO)
First Bancorp (FBNC)
First Hawaiian (FHB)
Grupo Financiero Galicia (GGAL)
Itau Unibanco Holding (ITUB)
M&T Bank (MTB)
Nicolet Bankshares (NIC)
Origin Bancorp (OBNK)
Preferred Bank (PFBC)
Seacoast Banking (SBCF)
Stellar Bancorp (STEL)
United Community Banks (UCBI)
Valley National (VLY)
Veritex Holdings (VBTX)
Westamerica Bancorp (WABC)
Washington Federal (WAFD)
Western Alliance (WAL)
Wintrust Finl (WTFC)