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Motley Fool: Bank on it – online

Axos’ low-cost, online business model gives it a big advantage over its brick-and-mortar peers. (Axos)
Axos’ low-cost, online business model gives it a big advantage over its brick-and-mortar peers. (Axos)

The internet revolution has changed everything about the way consumers conduct their financial affairs. Online banks give people access to regular bank services such as checking and savings accounts, CDs and loans. One of the pioneers in online banking is Axos Financial (NYSE: AX).

Axos’ stock dropped last year because of the company’s rising expenses. For example, since Axos pays higher-than-average rates on deposits, rising interest rates have caused its interest expense to soar. However, its long-term growth story is still intact.

Axos has had a busy year: It changed its name from Bank of Internet USA, made acquisitions such as Nationwide’s deposit base, and invested heavily in its new proprietary banking platform, Universal Digital Bank, which combines all of its products and services into one unit, allowing for more cross-selling and customized solutions for customers.

Axos’ low-cost business model gives it a big advantage over its brick-and-mortar peers. For example, Axos generated a 15 percent return on equity in the most recent quarter – well above the industry benchmark. Plus, with less than $10 billion in assets, Axos is a rather small banking institution – with lots of room to grow. On a year-over-year basis, net income increased by nearly 23 percent, and the bank’s loan and lease portfolio has increased by more than 14 percent. (The Motley Fool owns shares of and has recommended Axos Financial.)

Ask the Fool

Q: If one of my holdings goes bankrupt, do I lose my entire investment? – T.L., Batavia, New York

A: It all depends on how the bankruptcy unfolds. Some companies file for bankruptcy protection and then fix their businesses, as General Motors and former American Airlines parent AMR did. Others, though, such as Pan American World Airways and Circuit City, don’t. Even those can still be worth something if they can sell their name or other assets, or if they’re bought by another company.

Common-stock shareholders, unfortunately, tend to receive little or nothing when a company’s assets are sold; they’re last in line to collect, following creditors (banks, bondholders, suppliers, etc.) and holders of preferred stock. Companies also often emerge from bankruptcy with their original stock (the ones shareholders owned) having been deemed worthless and canceled, and new shares issued.

Aim to keep up with your holdings and their progress, so that you’re not surprised by a bankruptcy filing. At least read their quarterly and/or annual reports.

Q: Can you explain the term “run rate”? – S.S., Knoxville, Tennessee

A: A run rate annualizes numbers, making it easier to see how a company is doing. Imagine, for example, Farm Dogs Inc. (ticker: BINGO), which is growing quickly. If you add up its past four quarters’ worth of sales, the result would not reflect its current strength, as each quarter’s numbers have been rising.

If you instead take the most recent quarter’s sales – of, let’s say, $25 million (up from $20 million the quarter before and $17 million before that) and multiply that by four, you’ll get the company’s current run rate for sales: $100 million. It more accurately reflects the current level of annual sales.

My smartest investment

My smartest investment was buying 300 shares of Dell Computer in 1993 for about $5,000 (they were trading for almost $17 per share). When Dell stock hit $43 per share, my broker suggested that I sell. I decided to sell half of my shares.

When the stock hit $90, I sold 50 shares because I thought it was best to hold a “round lot” – 100 shares. After I sold, the stock split several times and my 100 shares ended up worth about $250,000. That’s great, but they would have been worth $750,000 if I hadn’t sold any. – H.Y., Cherry Hill, New Jersey

The Fool responds: There are situations in which shaving off some of your shares – or selling all of them – would make sense. If the shares grow so much in value that they end up being a big portion of your portfolio (say, more than 15 percent or 20 percent), then selling some can keep you from having too many eggs in one basket. If you are no longer confident in the company’s prospects, you might shrink your position in it or sell all your shares.

Dell has had a bit of a complicated history: Its founder took it private in 2013; in 2016, Dell and an investment firm bought the data storage giant EMC; and it re-entered the public markets at the end of 2018.

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