from the March 2005 issue, Investment Advisor magazine

With $213 million in assets from five clients, Raymond Stewart is ready to take on some new business. Instead of going after more clients among the big state and municipal pension funds he now serves, Stewart, president of RASARA Strategies Inc. in Briarcliff Manor, New York, is aiming his sights at wealthy individuals. Among asset managers, Stewart is a standout for both his investment style and his performance. Stewart is a value investor and onetime Salomon Brothers banking analyst who founded RASARA in 1992. He continues to focus solely on bank and financial-services stocks, especially smaller regional and local firms. With mergers sweeping the industry, Stewart’s keen eye has paid off: Since 1997, RASARA has returned an average of 16% annually, versus 8% for the S&P 500 and 8.7% for the S&P 1500 bank index. Editorial Director William Glasgall spoke with Stewart recently.

Will banking consolidation continue? 
Oh, sure. Two hundred to 300 banks have been merged each year for the past 10 or 15 years, but 100 new banks are being founded each year. So the whole consolidation thing should perpetuate itself. I’ve made a ton of money [on mergers] in New Jersey and Illinois in the past 20 years.

Do you chase merger rumors? 
I don’t like excitement. I like boring. Boring can be beneficial. I buy banks at 11 to 13 times trailing 12-month net income with 11% to 12% earnings growth. They tend to get acquired at 15 to 20 times earnings.

Will the flattening yield curve hurt banks’ net interest margins?
That’s the market perception, but that’s a 1980s mentality—fixed-rate assets and floating-rate liabilities. Today we have variable-rate flexibility on the asset and funding sides.

How patient an investor are you?
I’ve had North Fork Bancorp [NFB] for eight years. They know their market and have been in it for a long time. But my most interesting bank is UCBH Holdings [UCBH]. It grows at 20% per annum. It’s pricey—the P/E is in the low 20s. It’s an ethnic bank that focuses on the Asian community in San Francisco and Los Angeles. It may come into New York.

What are you doing outside banking?
I own Charles Schwab. It was a distressed purchase—my cost basis is $6 or $8.

The stock is back around $10 but Schwab’s hardly out of the woods. Is it takeover bait? They have a great franchise. But sometimes it’s a lot easier for an outsider to do what needs to be done.

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