Today I am recommending a stock that moved up yesterday by about 40%.  Up about about 200% from the lows of 2023.  (Yes, this is a long recommendation.) Sounds pretty… pretty… pretty…good huh?  I’m used to fishing in smaller ponds, and normally looking at stocks with substantially less liquidity.  I’m also used to looking at ideas that are at 52 week lows.  Not 52 week highs.  So this situation is somewhat unusual for me.

The stock is HomeStreet Inc. and it is a bank that focuses on MultiFamily lending, primarily in the growth centers of the western states.  It is up today based on a MOE with FirstSun Capital Bancorp a large regional financial holding company based in Denver Colorado.  Under the terms of the deal, shareholders of HomeStreet will receive .4345 shares of FSUN.   The deal should close in the middle of 2024.  FSUN at the time of this writing is up around 5% since the deal was announced. 

There is decent volume in both HMST and FSUN as a result of today’s announcement.  I view this as a practical way to build a position in FSUN, which I think should perform well over the next 3 years as this merger is digested.

Why do I like it?  Two reasons.  The first is that FSUN is a cheap security and with this deal they will be uplising from the OTC markets to Nasdaq and I believe this alone will be a catalyst.  The second is that this is a compelling deal with Homestreet, is very accretive to earnings, and I think other investors will view it the same way. 

First reason.  FSUN is cheap as a stand alone bank because (like many of our investments) it has a liquidity discount (average daily volume is around 6k shares per day) and there is a minority share discount (the float is small) and last but not least there is what I call a marketability discount (like most of our investments, it trades OTC).  This is the normal trifecta that creates a cheap security that we are drawn to like a moth to a cheap incandescent light bulb.  So when I say it is "cheap" it is cheap based on earnings and price to book value relative to its peer group.  Until yesterday it was missing a catalyst.  I think these discounts will dissipate when the stock gets uplisted in the summer of 2024.  Volume should increase as a result of a larger combined entity.  And the majority holders of FSUN will own less of the pro form entity, float should increase with price.

Second reason.  This merger is both strategic and transformational. 

·         Good geographic footprint of combined entity, no overlap            

·         Two different primary lending strengths HMST with Multifamily and FSUN with C&I.

·         HomeStreet is Liability Sensitive and FirstSun is Asset Sensitive.

·         HomeStreet brings a valuable FNMA DUS license to the deal.

·         FirstSun brings Treasury Management and Wealth Management to the deal.

Proforma, the combined entity gives FirstSun a 30% earnings accretion, with minimalbook value dilution.  Combined fee income will be 22% of total revenue – making this a very attractive institution.  Fee income is highly coveted in banking, normally earns a higher multiple than interest income - for the generalists.  Management is projecting 2025 earnings at 6.05 per share.

Where should this trade in 2025?  Based on listed peers, from a price to book value perspective this could conceivably appreciate up 50% from here.    It gets even more interesting when compared to listed peers on an earnings basis.  The peer group trades at around 11 times earnings, which implies that the stock could double and be considered “in-line.”

Apologies for the brevity.  Frankly this is something I suspect others might appreciate and wanted to get this out while volume was decent.   I could have beefed it up a bit by pasting some graphics into this layout, but decided to focus on the primary drivers.  This idea checks several boxes and has some favorable tail winds.  In an effort to be timely, I have omitted some important information.  Many of these details are covered here.

https://www.sec.gov/Archives/edgar/data/1709442/000162828024001296/exhibit992-8xk.htm

Worth noting, on the call yesterday, management did not disclose how many warrants are being issued to the new capital or the terms.  So that is a bit of uncertainty.  Yes this is a bit of a merger-arb idea, and there is risk that the deal doesnt close. FSUN already has voting agreeements in favor.