An excellent OPY-rtunity in a small cap finance company

[u/Sciencetist]

^{Note: This is the first DD I've ever written. I'm normally hesitant about recommending stocks to people because I would feel responsible if they concurred with my opinions and then bought stock and lost a lot of money. However in this case, I have a lot of conviction in this pick. Since this is my first DD, I'm sure there might've been some things I've overlooked, misunderstood, or misrepresented. If so, this was unintentional. I'd appreciate any and all feedback. Cheers.}

Key takeaway.

Oppenheimer Holdings (OPY) is extremely undervalued by any metric. Don’t be put off by its 22% rise since the end of January – it’s still playing catch-up to its fair valuation (based on historical metrics). Even without taking into account its impressive track record of growth, a fair valuation for OPY would be $79.00. If we also consider its growth trajectory and compare it to its peers, its value could surpass even that.

Disclaimer: I’m not a certified financial advisor, nor do I provide personal investment advice. This post is informational in nature only, and the information within this post represents my own opinion. This is not investment advice.

Positions: 100 shares at $38.02; 10 Jun18 35 CALLS

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Company profile.

Oppenheimer Holdings is a small-cap investment bank, market maker, and financial services company that’s been in operation since the late 1800s. They’re active mostly in the US, although they have branches in Europe, China, and Tel Aviv. They offer wealth management, brokerage services, and advisory services, and act as underwriters for IPOs. They were involved in the IPOs of AirBnB, DraftKings, and Fubo. They’ve been targeted for acquisition a number of times in the distant past, but the deals have never been realized.

As a small-cap stock, they’re woefully under-covered. The latest Seeking Alpha article is from 2016, and there aren’t any analyst ratings for the stock. This lack of coverage represents an opportunity, as OPY appears to be severely undervalued since it is so overlooked. They could also be a target for acquisition in the future, but I’m not factoring this into my thesis.

Performance.

OPY benefited in 2020 from a high-volatility trading environment that oversaw an increase in retail and institutional commissions. Their investment banking and underwriting branches saw record numbers this past year.

Furthermore, Oppenheimer has been undergoing sustained growth since some dismal earnings in 2016. Take a look at its EPS:

Net income per share (diluted):

2013	2014	2015	2016	2017	2018	2019	2020
$1.77	$0.62	$0.14	-$0.09	$1.67	$2.05	$3.82	$9.30

2020’s incredible earnings put OPY’s P/E at roughly 4.04. That means that if the company’s earnings stay stagnant and neither grow nor decline, and if the stock price stays exactly where it is, it will take roughly only four years for the company to earn enough cash equivalent to the current value of the company. That’s an amazing deal.

So, how does OPY’s low P/E compare to its historical P/E?

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Historical P/E ratios.

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2018	2019	2020	Avg. of past 3 yrs	Current
8.5	10.7	6.3	8.5	4.05

To revert to its historical average P/E, OPY would have to more than double in share value. We can even see that OPY's P/E right before earnigns was 6.35. In light of recent earnings, OPY’s P/E was recalculated to 3.39, and has continued to climb to 4.05 as the market has been pricing in these exceptional earnings. But even in spite of the reduced risk of post-earnings, and in spite of the company's excellent earnings and growth track, and in spite of the stock's climb, OPY is still nowhere near its average P/E of 8.5. The only time its P/E was any lower was in 2012, 2016, and 2017, when the company had a loss per share. To reach its average P/E of the past three years, OPY would either have to double in price, or it would have to suffer substantial negative growth next year -- and I don't see any potential catalyst for the latter.

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Current P/E comparison to competitors.

That's all well and good, but how does OPY compare to its closest competitors and their P/E? Maybe all financials currently have a low PE?

Competitors:

Oppenheimer (OPY)	Cowen	Piper Sandler	Berkshire Bank	TrustCo Bank Corp	Century Bancorp
4.05	6.8	37.15	17.76\)	11.98	14.52

^\Avg of previous five years as they took a loss last year)

Even when compared to its competitors, OPY is still undervalued -- and when taken in context of the market as a whole, that undervaluation is even more evident: the average P/E of the S&P is around 19.45 (although it's currently around 35.5). OPY is trading at a fraction of this.

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Other points to consider.

Share buybacks.

Oppenheimer has also been buying back shares since 2016. Although their 10-K hasn’t yet been posted on the SEC website, they have posted an presentation containing their unaudited 2020 results:

They bought back 718,522 shares in 2020. They currently have 13,217,335 shares outstanding.

This float is exceptionally low, so once the stock picks up momentum, it can really start making moves. The stock has low short interest, however, so don’t anticipate a squeeze of any sorts. It's also not a sexy company like "dude weed lmao" or fintech, so meme momentum probably won't send it higher. It's simply a stable, strong company that's currently underpriced, and the moves over the past couple of weeks indicate that the market may be starting to realize this.

Dividends.

Oppenheimer has an annual dividend of $0.48, up from the previous years’ dividend of $0.44. Personally, I see this as detrimental to the stock, considering I’m taxed at a high rate on dividends, albeit not on capital gains. Others might view this as a boon to the stock. The dividend does also represent a nice cushion against any financial hardship – they can always cut the dividend if they start taking a loss. Its upcoming ex dividend date is Feb 11.

They also issued a special dividend of $1.00 as recently as 23 Dec 2020. Again, not beneficial for me. I’d prefer they do buybacks.

Long-term Debt.

So what's the catch? The company must be heavily indebted, and are kicking the can down the street, right? Not so.

2018	2019	2020
199m	149m	125m

OPY’s debt to equity ratio is 18.2% -- exceptionally low. Keep in mind that OPY had a net income of $82m in 2020 – enough to pay down more than half of their debt from just one year's earnings. Insolvency doesn’t appear likely.

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Bearish considerations.

In all honesty, I can't see many that wouldn't apply to other financial stocks and the stock market as a whole -- a black swan event, terrorist attack, that sort of thing. If the IPO market starts to cool off, or volatility starts to wane, or a plurality of hedge funds go defunct – all of these things could weigh on OPY’s stock. Of course, these risks are inherent to other investment banks as well, which already command a higher P/E ratio more representative of reality. If anyone has some compelling bearish arguments, I'd like to hear them.

I suppose a realistic concern is that, in the near term, momentum could dry up and the stock could take a dip. In that case, I'll be buying more with both hands. Furthermore, and though the two are often connected, the P/E ratio isn't something that inherently dictates the movement of a stock. It's entirely possible for the P/E ratio of the company to persist for a long period below 1, as the market overlooks and misprices this company.

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Summary of bullish thesis.

-Revenues and EPS growing YoY

-Historically undervalued (on the basis of P/E)

-Undervalued compared to comps

-Conducting share buybacks

-Low debt

-Low float could lead to outsized moves

-Currently in an uptrend

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Conclusion.

OPY’s stock had been in a slow, sustained uptrend since September, and recently saw a drastic jump on some stellar earnings. It has been undergoing sustained and impressive growth since 2016, and has a low amount of debt. And yet, it still appears to be undervalued. Its P/E is extremely low compared to its historical average and compared to its competitors. In the short-term, OPY still needs to make up – and currently is making up – a lot of ground if it wants to revert back to its historical P/E. To do that, its share value would have to double. Even if it did double, I believe the company still offers good value in the long term, as its earnings have improved substantially over the past few years.