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What You Were Selling Last Week: TSB Banking Group PLC

TSBOne of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful”. Or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been selling recently might well provide us with some ideas for investments that may be past their prime.

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So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been selling in the past week or so, and what might have made them decide to do so.

A quick profit

When TSB (LSE: TSB) was floated on the stock market last week, its share price immediately shot up from the listing price of 260p, reaching a premium of 15% when it briefly hit a high of 299.75p.   So it’s perhaps not surprising that many people decided to take a quick profit, putting the newly floated banking group straight into the number one spot in our latest ‘Top Ten Sells’ list*.

And perhaps they made the right decision.  TSB’s share price has since fallen back to around 284p, That’s still a healthy 9% gain on its listing price, but suggests that unlike some recent flotations — Royal Mail springs immediately to mind (it’s up nearly 50% since it was listed last October)  — the offer price was pitched somewhat more realistically.

Should I stay or should I go?

But should the sellers have held? For one thing they’ll miss out the free “loyalty” shares that will be given out next year — individuals who bought in the IPO and hold their shares for a year will be given one free share for every 20 they still hold, up to their first £2,000. That’s a nice 5% “bonus”, but only up to a relatively low cap, so for many people taking the money now might well have been more attractive.

Whilst TSB’s future performance is obviously not assured — it’s not easy being a bank these days — the new company does have some significant advantages. It’s starting with a clean slate and isn’t tainted by any of the mis-selling, bad debt or rate-fixing scandals that have beleaguered the UK’s existing high street banks in recent years.

It’s also just a retail bank, and doesn’t have to concern itself with the complex, high-risk world of investment banking. And it’s beginning its fully independent existence with an established network of 631 branches and 4.5 million customers, which gives it a massive head-start on any would-be challengers. The downside risk for TSB is arguably as low as you’re likely to get for a bank.

No dividend

On the other hand, there are serious points against TSB. For one thing, banks have a history of attracting long-term, income seeking investors by paying a chunky dividend. But that won’t be the case with TSB for some time — the new bank has already indicated that it doesn’t expect to pay a dividend until at least 2017.

Its loan book is currently packed with fixed-rate and capped mortgages, making for very meagre margins in the current economic climate. And TSB has set itself the ambitious target of expanding its loan book by 50% in just five years, which runs the risk of making some incautious decisions when offering money.

Lloyds has only sold of 35% of its stake in TSB so far, but must divest the rest by the end of 2015, so it’ll be interesting to see what happens when the next tranche of shares is offered to the market.

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Jon doesn't own shares in TSB.

* based on aggregate data from The Motley Fool ShareDealing Service.