This Standup CEO Could Guide You to 100% Returns

If there's one thing I've learned throughout my more than 20 years in the markets, it's that, with some companies, there's more than meets the eye.

This was especially the case with Home BancShares Inc. (Nasdaq: HOMB), a regional bank based out of Conway, Ark.

Home BancShares

On a Friday afternoon back in summer 2016, I was wrapping up my work and heading out for my weekend "pizza and vino" run when I got an e-mail from Home BancShares Chair John Allison.

Now, I had just published an article about banks I thought were overvalued at the time based on the price-to-book ratio.

Mr. Allison's company made the list, and he thought my article was a little unfair to his bank.

Don't be mistaken: He didn't chew me out or anything.

He's a standup guy who wanted to have a thoughtful conversation and provide me with his side of the story.

And let me tell you that, if I had a bank, I would definitely want Allison as my CEO...

Here's How One Fateful Phone Call Changed My Mind

When I wrote that story, Home BancShares had a market capitalization of around $600 million and $9 billion in total assets. It was highly unlikely that my article would cause a run on his stock price, but he cared enough about the company to reach out anyway.

At the time, he was vacationing in the Florida Keys, so I was flattered that he took the time out of his weekend to share with me his vision for the bank.

Mr. Allison explained his bank's growth strategy: buy well-located, underperforming banks and improve their internal rates of return to the much higher returns his bank was already earning.

He insisted that all deals have a positive return from day one and that his bank never dilutes current shareholder earnings or book value per share.

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After we talked for some time, I came away from the Saturday afternoon conversation with three enlightening conclusions...

First, Allison was using the exact same approach to buying banks that I used, but he was buying the whole bank and not just a few hundred shares. I may have a decent pile of cash to put to work, but I'm just one guy, so while we both have different amounts of capital, we still have the same philosophy when it comes to buying banks at a nice discount.

Second, he and his team had the sharpest pencils in banking and were very good at doing deals that built value for shareholders.

One of those deals included Stonegate Bank, which expanded Home BancShares into Florida, with 89 new branches, and even New York City, with one branch.

And the third reason I was so impressed with Allison was that he's someone who took the time to explain the secrets of his profit-making machine.

This is the kind of CEO I would want running any company I owned.

Of course, you can own a slice of this company, and it could double your money by next year...

How John Allison Could Double Your Money - or More

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You see, John Allison treats his shareholders the way a CEO should: with an eye on increasing the value of the company.

That's a huge surprise, when you consider he and his family are among the bank's largest shareholders.

The management and board of the bank all have skin in the game and collectively own almost 10% of HOMB stock.

Since our conversation, Mr. Allison and his team have increased the total assets of the bank to over $14 billion with sharp deal-making.

And when the bank's executives spoke at the May 7 Gulf South Bank Conference in New Orleans, they expressed interest in future M&A deals, even saying they were currently evaluating two opportunities to build value for shareholders.

This comes as no surprise, as the management team has mastered the art of the deal.

And thanks to brilliant execution, the bank's revenue has grown 14% a year over year the past decade.

The management team also excels at buying poorly performing banks and reducing costs.

That revenue boost has led to an annual increase in earnings of more than 24% a year and annual free cash flow growth of more than 30%.

Now, this isn't some cautionary tale of achieving uncontrolled growth by any means necessary.

You can tell that from the efficiency ratio, which determines how weakly a bank is managing its resources and expenses.

A lower ratio is better, and Home BancShares has one of the lowest in the industry. In fact, its current efficiency ratio is almost 40% lower than the average bank.

And since management builds revenue and controls cost, it can consistently earn returns that are far higher than most of its competitors.

It is not too often that you buy a best-in-class company at a bargain multiple, but that's exactly the opportunity I'm seeing with HOMB at current price levels.

Allison told me on that June afternoon in 2016 his near-term goal was to get earnings up to $2 a share.

He also projected that Wall Street would reward that earnings growth with a 25 multiple. Voila - HOMB would achieve a $50 stock price and double your money.

Right now, I'm confident he could reach that $2 mark in 2019 (unless he finds a deal that gets him there quicker), and that type of solid growth will likely be rewarded at some point with his desired multiple.

With my math, those conditions coming true would give us gains of over 100% in a fairly short amount of time.

My chance talk with John Allison revealed it's much smarter to bet with him than against him. Owning Home BancShares at this price gives you a chance to bet with him at very favorable odds.

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About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

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