This year has been a tough market for Wall Street, with high inflation and rising interest rates as the main culprits. The S&P500 had its worst start to a six-month period since 1970, and the benchmark is currently down 17% year-to-date.
While temporary macro issues have weighed on the market, patient investors now have the opportunity to invest in stellar companies at great value prices. A beaten company that deserves your attention is Live Oak Bancshares (LOB 2.77%). Since peaking at nearly $100 per share last November, Live Oak stock has fallen 65% and its price is cheap and hard to ignore.
The small business bank
Live Oak Bancshares is a regional bank specializing in serving small businesses. It is the largest small business lender in the United States through the Small Business Administration’s (SBA) 7(a) lending program. This year, Live Oak has made more than 1,000 loans under this program, totaling nearly $1.5 billion, exceeding Newtek Business Services and Huntington Bancactionswhich granted $937 million and $890 million in loans, respectively.
Its focus on small businesses has made it a big winner in the Paycheck Protection Program (PPP), which was introduced amid the pandemic to keep small businesses going. In 2020, the bank issued $2.3 billion of these loans, resulting in substantial fee and loan growth that helped Live Oak achieve its best year in 2021.
Market volatility weighed on this bank
Live Oak saw a slowdown in the sale of its SBA loans in the secondary market, selling just $50 million in loans compared to $211 million in the first quarter. The bank pointed to difficult market conditions due to rising interest rates as the cause. Fixed rate loans were a tough sell for the bank, as these loans will not be adjusted for higher interest rates, making them less attractive to investors.
As tailwinds from the PPP program fade and tough market conditions persist, Live Oak stock has taken a hit and is down 65% from its all-time high price last year and 61% since the start of the year. To put this into perspective, the SPDR S&P Regional Banking ETFs has lost about 13% since the start of the year.
Live Oak stock has been trading at a high valuation for the past two years, with its price-to-earnings (P/E) ratio trading near 40 at the start of 2021. However, after its sell-off, the stock is trading at a P/E ratio of 7.8 – its lowest level since 2019 and well below its 10-year average.
Live Oak is a quality bank ready to bounce back
Live Oak is a blue chip bank that tends to be misunderstood by investors. The bank has built a solid understanding of small businesses and a diverse portfolio of businesses that can stand the test of time. He maintains a solid credit profile; since 2013, it has written off 0.3% of SBA loans, well below the program’s average rate of 4%. In addition, 44% of its loans and leases are government guaranteed loans.
The bank has also built up a strong portfolio of venture capital investments. For example, it recently made a $120 million gain on the sale of its investment in Finxact, a fintech solution that helps digitize banking services, helping banks rapidly roll out new digital banking products. This gain has given Live Oak a good injection of capital which it can use to continue to strengthen its lending and technology teams and also invest in other venture capital investments.
Live Oak’s expertise with small businesses makes it attractive, and being a branchless bank helps it cut expenses relative to its peers, making it highly efficient. Although the bank still faces near-term headwinds from rising interest rates and uncertainty in secondary selling markets, these pressures could ease if interest rate hikes slow. , making Live Oak stock an obvious buy at its current valuation.
Courtney Carlsen has no position in the stocks mentioned. The Motley Fool holds positions and recommends Live Oak Bancshares. The Motley Fool has a disclosure policy.