Does CIT CEO Thain’s Recent Stock Purchase Represent a Bottom?

reminiscences of a stock operator pdf

CIT Group Inc. (NYSE:CIT) CEO John Thain has a knack for timing his investments in the company he manages.  Could Thain’s recent purchase of 40,000 CIT shares on May 15 indicate the firm has hit another floor?

A recent research report from BTIG Research notes Thain’s successful track record at picking the lows in CIT Group Inc. (NYSE:CIT) stock while speculating a stock buyback might be in the offing.  The report also said CIT could be a potential acquisition target, saying “we think the risk-reward for CIT is very attractive in its current context, as downside appears limited and the shares offer positive optionality.”

CIT Group stock buyback

A stock buyback is a typically an activist investor’s quickest path to stock appreciation, and the BTIG report notes that one could be announced as early as June 25 at an investors day.  “Given CIT Group Inc. (NYSE:CIT)’s Tier 1 Capital and Total Capital ratios were 16.1% and 17.4%, respectively, at March 31, we believe the company could authorize as much as another $1.4bn in buybacks on top of what has already been authorized,” the report said.  “CIT on April 29 announced that its Board of Directors had approved an additional $300mm in buybacks, giving it $395mm in dry powder at that point. (CIT’s total buyback authorization for FY14 stands at $607mm, but the company had already bought back $210mm in shares through March 31.) However, that amount is a fraction of the amount that CIT could potentially use for repurchases.”  If there is anyone in a position to know about buybacks, it would be Thain.

Undervalued

The report noted that one “longer-term catalyst for CIT Group Inc. (NYSE:CIT)” could come as “the potential reversal of its valuation allowance for its deferred tax asset (DTA), which stood at about $1.5bn as of YE13” occurs. “A full reversal of the allowance would translate into a boost to CIT’s tangible book value (TBV) of approximately $8 per share, or about 16% of the company’s tangible book value of $42.90 at March 31.”

Track record of buying on a drawdown most hedge fund managers would admire

In the past Thain has been a most proficient stock market timer, picking the bottoms with the skill of someone who knows the inside of the firm he runs.  On August 23, 2011, the report notes Thain bought 40,000 shares of his company’s stock at an average price of $29.91 for total consideration of $1.2mm. Although Thain’s purchase followed a period of significant under-performance by CIT Group Inc. (NYSE:CIT) shares, the investment would soon rebound.  When Thain made this purchase, shares had declined by 37.9% from January 14 of that year, “capped off by a steep drop in August as fears about the impact of Europe’s debt crisis roiled the markets that month.  In under seven months, the report notes, CIT shares popped to $43.19, representing a 44.3% move since Thain’s purchase. “While the shares retraced somewhat in May-June 2012 and again in November 2012, they reached a peak of $52.72 on January 9 of this year, providing Thain with a 76.3% return since his buy.”

“Thain’s August 2011 purchase of CIT Group Inc. (NYSE:CIT) didn’t represent the absolute low for the company’s shares in 2011 – they dipped a bit further and closed at $29.12 on October 3, 2011 – but it wasn’t too far off. And from the point at which the CEO bought shares, many investors told us they felt that his buy had established a floor for the stock.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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