The Big 4 Banks: Defense Or Attack As A Long-Term Strategy?

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Includes: BAC, C, JPM, WFC
by: Colin Lea

One of the most likely targets to underperform in the current financial markets is the banking sector. Investors still have fresh memories of the 2008 global financial crisis and its flow on effects, and many investors are still wary of Banks being what they should be; defensive assets with strong financials and paying a good returns on income invested. But what if these time proven blue chips could be potential penny stocks, or worse yet, the next Lehman Bros? And where does your risk to reward ratio place you as an investor? With this in mind, I have taken a look at the big 4 banks in America, to see what potential underlying value resides for long term position investors.

#1 – Bank of America (NYSE:BAC). Currently trading at $6.52, a 58% ($8.87) discount to its 52 week high of $15.29 per share. It took a larger battering yesterday than most, down 7.89%, $1.18 below its five day high. Should you seek to invest your hard earned cash in the bank (rather than invest in its shares), you’ll receive up to 0.50% for funds under management, up to $2.5M.

#2 – JP Morgan Chase (NYSE:JPM). Currently trading at $33.43, a 30% ($14.43) discount to its 52 week high of $47.86 per share. It dropped $0.92 yesterday, approx. $3.57 below its five day high. The stock is currently trading at a P/E ratio of 7.30, and should you seek to invest your hard earned cash in the bank (rather than invest in its shares), you’ll receive up to 0.35% for funds under management, up to $2.5M.

#3 – Citibank (NYSE:C). Currently trading at $26.10, a 49% (approx $25.40) discount to its 52 week high of $51.48 per share. It dropped $0.67yesterday, approx. $4.70 below its five day high. The stock is currently trading at a P/E ratio of 8.40, and should you seek to invest your hard earned cash in the bank (rather than invest in its shares), you’ll receive up to 0.10% for funds under management, up to $2.5M.

#4 – Wells Fargo (NYSE:WFC). Currently trading at $22.89, a 32% ($11.05) discount to its 52 week high of $33.94 per share. It dropped $0.47 yesterday, approx. $2.31 below its five day high. The stock is currently trading at a P/E ratio of 9.20, and should you seek to invest your hard earned cash in the bank (rather than invest in its shares), you’ll receive up to 0.30% for funds under management.

A Defensive or Attacking Investment Posture?

So having taken this into account, what are the benefits to holding the stock, versus investing in the banks? If investors are genuinely concerned about the financial stability of the share market, then for many, the defensive posture to take is to deposit funds in the bank. Sure their funds (up to $250,000) are insured by the FDIC, but the return on investment is virtually nonexistent. For this level of risk return, investors may as well take their money and keep it in a safe deposit box at home, or invest in non financial sector stocks.

The more aggressive investor though is likely to attack with a long-term position in achieving significant capital growth over a 2-3 year time frame. During this time, dividend income should match, if not eventually outperform the banks' current paltry interest rates. After all, if you’re going to have your money in the bank, why not be well and truly inside the banks?

Disclaimer: This advice is general in nature only and investors should seek independent advice prior to making any investments in the current market climate. All figures have been taking from www.seekingalpha.com and all interest rates have been taking from each banks' website.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.