Description

CPKF is a thinly traded OTC security, making this investment suitable for PAs and tiny funds only. 

I wrote this up in February of 2014 at $17.10. I refer you to that write-up for explanation and analysis of the company. Since that write-up, there has been a 6-for-5 split, so today’s split-adjusted price is $24.74 before dividends. Despite the appreciation in the stock price, the trading multiples haven’t expanded much. In 2012, P/E and P/TBV were 8x and 0.9x. Today they’re 11x and 1.0x.

Chesapeake is a very high-quality community bank with a history of earning 1% on assets and 10-15% on equity. Today, ROEs are at the low end of this range because the bank has allowed capital to accrue on the balance sheet rather than compromise lending standards. With assets at just 8.9x equity, the bank is less leveraged today than it has been at any time in recent history. NPAs are negligible.

Chesapeake trades at a 10% discount (on P/TBV basis) to a group of micro-cap banks in its region (the Mid-Atlantic), despite ROEs and ROAs that are 30% above the peer group. I continue to believe Chesapeake should trade for 1.3-1.5x tangible book, with the high end admittedly being more likely in a take-out than in public trading.

At the current price, you get a 9% earnings yield, plus a few points of growth per year, plus any further multiple expansion. If the stock re-rates to 1.3x book over three years, you’ll likely earn a ~20% IRR. I know this isn’t a sexy idea, but I think the likelihood of compounding your capital at an above-market rate is high.

I apologize for the simple write-up. I know this idea will get low ratings. However, the thesis for investing in Chesapeake has not changed, so I’d rather refer you to the original write-up than try to invent new reasons for you to buy the stock.

Catalyst

I'm all ears.