Are European Bank Stocks a Bargain?

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The tried and true way to make money in the stock market is to buy low and sell high. Unfortunately, this is much easier said than done. If it were that easy, everyone would be rich and there'd be little reason for you to be reading this right now.

The best way to accomplish this comes to us courtesy of Warren Buffett, the chairman and CEO of Berkshire Hathaway (NYS: BRK.B) and the third-richest person in the world, with an estimated fortune of $45.4 billion. According to Buffett, the key is to be fearful when others are greedy and greedy when others are fearful.

But what exactly does this mean? Quite simply, it means that the time to buy is when the market is down and other investors are afraid to venture in. In other words, successful investors essentially reverse the biological tendency to flee from danger and choose to fight in the face of it instead.


The scariest stocks in the market
By this measure, it'd be easy to conclude that the world's most prescient investors must be piling into bank stocks like it's going out of style. In the middle of last year, for example, Warren Buffett's Berkshire placed a $5 billion wager on Bank of America (NYS: BAC) . While the ailing lender was trading for a pittance of book value at the time, having lost 87% of its stock price since 2007, the stock is up nearly 40% since his purchase. And as I write, it's the top-performing stock on the Dow Jones Industrial Average for 2012.

But while the train may have left the station for American banks like B of A -- although I personally believe it still has a ways to go, as Foolish banking sector editor Anand Chokkavelu pointed out in "How Bank of America Gets to $20 a Share"-- the same cannot be said for Europe's biggest lenders.

As you can see in the table below, some of the Continent's best-known banks are, well, floundering, to put it nicely. At the top of this list are the National Bank of Greece (NYS: NBG) and the Bank of Ireland (NYS: IRE) , both of which are down more than 60% over the previous 12 months. And not far behind is the eurozone's largest lender, Spain's Banco Santander (NYS: STD) , which is down 28.5% over the same time period.

Bank

Country

12-Month Return

Price-to-Book

Banco SantanderSpain(28.5%)0.61
Bank of IrelandIreland(61.2%)0.38
Deutsche BankGermany(14.1%)0.63
National Bank of GreeceGreece(69.8%)0.24
UBSSwitzerland(22.3%)0.89

Source: Finviz.com.

But are these banks a bargain?
To determine whether a specific bank stock is a bargain, most investors look to the price-to-book ratio. As the name implies, this compares the price of a bank's stock to the amount of its book value on a per-share basis. According to Yahoo! Finance, for example, the Bank of Ireland's shares trade for $6.61 and its book value per share is $18.04. Its price-to-book ratio, in turn, is 0.38 after rounding all the appropriate figures.

A general rule of thumb among bargain-minded bank investors is to "buy at half and sell at two" -- meaning to buy bank stocks when they trade for half of book value, and sell them when they trade for twice that. In this case, that would lead one to believe that both the Bank of Ireland and the National Bank of Greece are bargains and should be bought. This is the very course recommended by our Motley Fool Special Ops newsletter, in fact, which advised its members to stake a position in the former institution.

Consider yourself duly warned!
Before you toggle over to your brokerage account and entering a "buy" order, however, a word of caution is appropriate. As I've written on a number of occasions -- most recently in a discussion about austerity and depression in Ireland -- the situation in Europe is far from settled. There's even a chance that the euro won't survive the ongoing sovereign debt crisis. While I believe that scenario is both unlikely and unwise, if you're considering buying these stocks, consider yourself forewarned.

On the other hand, if you're looking for a bank stock that's closer to home, there's one that our analysts believe has massive potential. This lender has been at the top of Forbes' list of America's best banks three years running, and its stock still has significant ground to make up since the downturn. And to top things off, it pays a generous 3.7% dividend yield. It's accordingly a great fit for value and income investors alike. To learn the identity of this stock before other investors catch on, download our free report by clicking here now.

At the time this article was published Fool contributor John Maxfield owns shares in Bank of America. The Motley Fool owns shares of Berkshire Hathaway, The Bank of Ireland, and Bank of America.Motley Fool newsletter serviceshave recommended buying shares of Berkshire Hathaway. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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