Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is BOFI the Most Overpriced Stock Around?

Anybody that takes a glance at the markets these days knows that there are a lot of overpriced stocks out there, Inc. (NASDAQ: AMZN) being the poster child for ludicrously expensive equities with dubious investment potential. Yet there is one company that stands out in my mind as having the most inflated shares currently being traded: BOFI Holding Inc. (NASDAQ: BOFI), the financial institution also known as Bank of Internet USA.

On paper, BOFI is a modest-sized bank that reported a TTM revenue of $229.53 million on June 30, 2015. With a market cap of $1.888 billion and an enterprise value of $2.158 billion, Bank of Internet is comparable in size to such regional financial institutions as Astoria Financial (NYSE: AF), which reported a TTM revenue of $395.02 million, a market cap $1.583 billion and an enterprise value of $4.103 billion on June 30, 2015, and Northwest Bancshares (NASDAQ: NWBI), which reported a TTM revenue of $315.21 million, a market cap of $1.187 billion and an enterprise value of $1.884 billion.

What Is Different about BOFI?

Yet BOFI was trading at $123.16 a share on August 25, 2015, while Astoria was trading at $15.71 a share and Northwest was trading at $12.55 a share. The situation seems unusual because BOFI’s only difference from regional banks is that it operates online.


The problem with that argument is that shares in another bank that offers nearly identical financial products to BOFI, EverBank Financial (NYSE: EVER), were trading at $19.65 apiece on August 25, 2015, even though EverBank reported a TTM revenue of $924.25 million, a market cap of $2.449 billion and an enterprise value of $7.537 billion on August 25, 2015.

Why are Bank of Internet’s shares trading at around 10 times the price of rivals that seem to be generating a lot more money? One popular answer is emotional; people seem to like Bank of Internet. It is one of the few financial institutions not associated with the Great Economic Meltdown of 2007 in the popular mind.

Is BOFI More Profitable Than Other Banks?

Another reason why BOFI is popular was revealed in this New York Times article; the online lender is willing to make a lot of mortgage loans that other banks are scared of. The Times noted that the average Bank of Internet mortgage has an interest rate of around 5%, while rival First Republic Bank’s (NYSE: FRCPRD) average mortgage interest rate is 3.01%.

The volume of mortgages BOFI issues is not that much higher than other banks, but those mortgages appear to be more profitable. That could be why Bank of Internet’s revenue was increasing at a rate of 45.01% on June 30, 2015. It could also be part of a trend. First Republic Bank’s revenue was growing at a rate of 21.78%, and EverBank’s revenue was growing at a rate of 11.27% on June 30, 2015.

There seems to be a growing demand for alternative mortgage products that these banks are meeting. That may not be so good because such banks are certainly vulnerable to the growing real estate bubbles in some parts of the United States, particularly the San Francisco Bay area and New York City. The volume of single family mortgages issued by BOFI has increased by 215% since 2012, according to The Times.

Questionable Lending Practices at BOFI

Bank of Internet is also making big loans to some very questionable characters, The Times reported. Its mortgage customers include Purna Chandra Aramilla, who got a $5 million mortgage for a house in Sands Point, Long Island. Mr. Aramilla is currently serving three years in federal prison on Medicare and Medicaid fraud charges. Another BOFI customer, Deepal Wannakuwatte, has been sentenced to a 20- year prison term on charges arising from an alleged Ponzi scheme.


If that was not bad enough, BOFI also gave a Florida attorney named John H. Ruiz a $4.8 million mortgage, The Times reported. Another bank, SunTrust, is suing Ruiz for not paying a $3 million promissory note. Bank of Internet officials were apparently aware of the SunTrust lawsuit before issuing the mortgage. When asked about the Ruiz case by The Times, Bank of Internet CEO Gregory Garrabrants admitted that his institution will lend to people who have defaulted on past loans in certain cases.

The financial numbers show us that BOFI is clearly overpriced, while The Times story indicates BOFI could be a much riskier investment than its competitors. The bottom line is that Bank of Internet is not only overpriced but it seems to be riskier. Call me old fashioned, but it looks like BOFI is headed for a fall sooner or later.

Bank of Internet is definitely the most overpriced stock around these days. Investors should stay away from it—far, far away.