Contrarian investors make fortunes turning lemons into lemonade. At the moment, the world's best investors are piling into bank stocks, even though Europe is in free fall and we're on the brink of a second recession. If you're inclined to join the market in making the best of a grim situation, here are seven banks whose shares look very appealing.
Banks are on sale!
After plummeting in early August, bank stock prices have yet to recover. The SPDR KBW Bank ETF, which traces the performance of publicly traded bank stocks, has fallen more than 15% since Aug. 1. The picture gets even grimmer if you look at its 27% year-to-date decline.
Source: Yahoo! Finance.
The seven bank stocks I'm watching followed suit. Regions Financial (NYS: RF) , a regional bank with 1,800 branches located primarily in the South, led the way in terms of poor stock performance since Aug. 1. Synovus Financial (NYS: SNV) , a smaller regional bank headquartered in Georgia, took the cake for year-to-date poor performance, and for distance from its 52-week high. And Bank of America (NYS: BAC) , my favorite in terms of value, came in second across the board.
Performance Since 8/1
Bank of America
SPDR KBW Bank ETF
BB&T (NYS: BBT)
US Bancorp (NYS: USB)
Wells Fargo (NYS: WFC)
New York Community Bancorp (NYS: NYB)
Source: Yahoo! Finance and Finviz.com.
But are they cheap?
Investors use the price-to-book ratio to determine a bank's value. This ratio compares the price of a bank's shares to the per share value of its equity - i.e., book value.
A ratio of 1.5 is normal. A ratio of 1 means the bank is worth the value of its equity, giving no credit for any kind of franchise value. And ratios either above or below these benchmarks suggest quality or distress, respectively. Though, as a general rule, I prefer the industry adage: "Buy at half and sell at two."
All seven of the banks I'm watching fall well-below the 1.5 benchmark. Six trade for less than book value. And three trade for less than half of that! It's for this reason, in turn, that my favorites are the three in the latter category: Regions Financial, Bank of America, and Synovus Financial.
So should you buy?
I think there's a killing to be made among financial stocks, as even the most stable among them currently trade below book value. This opinion, moreover, seems to be shared by investing greats like John Paulson, Warren Buffett, and Bruce Berkowitz, who've all moved into this sector over the past few years.
Whether you should buy into it now, however, is a question of personal outlook and risk tolerance. The current valuations are ridiculous, which explains my position in Bank of America. But I'm reserving capital in case they decline further following a second recession, heightened liability from mortgage-backed securities, and/or an increasingly likely default in Greece.
I recommend you add these banks to your watchlist and check in on them regularly. There's a strong likelihood that many financials will continue to deteriorate. However, a few cheap bank stocks should be major outperformers over the coming years. Click here to follow the contenders above on your free, personalized watchlist.
At the time thisarticle was published
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