Things were starting to look up for bank stocks after European leaders announced another plan to stabilize the debt and the banking concerns that have plagued global markets for many months. Then the Prime Minister of Greece announced a referendum vote which could put the fragile plan at significant risk. Investors are concerned that a default by Greece could lead to a run on banks in Europe and a contagion effect that could spread to other financial institutions worldwide. However, the worst case scenarios don't usually play out and investors might be overly concerned.
A recent CNBC article details the bull case and states:
Investors dumping U.S. bank stocks are overreacting to all the European debt crisis speculation, Rochdale Securities’ Dick Bove told Larry Kudlow Tuesday. “I think we’ve gone nuts,” he said. “I think these [U.S. bank] stocks are so cheap, that people should be buying them as aggressively as they could.”
The article goes on to say "But what's happening in Europe should not affect U.S. banks, Bove said, because most have virtually no exposure to the EU. Plus, most banks beat their earnings estimates for the third quarter." Bove believes that Europe will not allow their major banks to go bust, and will do what it takes to save them, just as the United States did at the height of the financial crisis. (Read the full article here.)
The U.S. banks are well-capitalized and after evaluating the book value, price to earnings ratio and historical valuations, it's easy to see that once the markets get past the issues in Europe these stocks could double. In fact, some of these stocks would just about be double if they were to trade at book value:
Bank of America (NYSE:BAC) has been hard hit by a near perfect storm of events including new regulations, lawsuits, a difficult acquisition of mortgage lender Countrywide, and more. However, BofA has been making tough choices and has taken steps for a turnaround, including raising capital. The company recently reported earnings which shows that it can still generate a profit even in a tough economy. The stock is trading well below book value.
Here are some key points for BAC:
- Current share price: $6.72
- The 52 week range is $5.13 to $15.31
- Earnings estimates for 2011: loss of 5 cents per share
- Earnings estimates for 2012: profit of $1.01 per share
- Annual dividend: 4 cents per share which yields .6%
- Book value: $20.80
Citigroup, Inc. (NYSE:C) is a banking and financial services giant. Almost every financial stock has been declining and Citigroup is no different. With so many negative headlines against banks, it might pay to buy this over time so you can average in. Citigroup has exposure to high potential growth areas such as emerging market countries and it has less liability with mortgage issues in comparison to other banks. This stock is trading at about half of book value.
Here are some key points for C:
- Current share price: $29.93
- The 52 week range is $21.40 to $51.50
- Earnings estimates for 2011: $4.08 per share
- Earnings estimates for 2012: $4.45 per share
- Annual dividend: 4 cents per share which yields .1%
- Book value: $60.56
JPMorgan Chase (NYSE:JPM) is one of the best managed and largest banks in the United States. With JPM trading at 8 times 2012 earnings and below book value, this bank stock might be the lowest risk way to play a rebound in financials. It also offers a better dividend than many other banks. This is the lower risk play here, but it might offer less rewards if the economy improves.
Here are some key points for JPM:
- Current share price: $33.47
- The 52 week range is $27.85 to $48.36
- Earnings estimates for 2011: $4.58 per share
- Earnings estimates for 2012: $4.93 per share
- Annual dividend: $1 per share which yields 3.1%
- Book value: $45.21
Synovus Financial Corp. (NYSE:SNV) is a regional bank with operations in Georgia, Alabama, South Carolina, Florida, and Tennessee. This stock was trading in the $2 range just a couple of months ago. Synovus can rebound back over $2 in time, especially as it has been considered to be a takeover target for a larger bank. If this stock trades back around book value, it would just about double from current levels.
Here are some key points for SNV:
- Current share price: $1.42
- The 52 week range is 94 cents to $2.99
- Earnings estimates for 2011: a loss of 18 cents per share
- Earnings estimates for 2012: a profit of 13 cents per share
- Annual dividend: 4 cents per share which yields 2.9%
- Book value: $2.47 per share
Morgan Stanley (NYSE:MS) is a leading investment bank. This stock is trading at about 6 times 2012 earnings and well below book value, which is $30.17. A recent CNBC article details one analysts view that the stock is oversold and poised for big gains in the long term. The article states "Sandler O'Neill principal Jeffrey Harte told CNBC Monday he is maintaining his "buy" rating on Morgan Stanley shares, despite their drop on the bank's possible exposure to French banks that have ties to Greece." It goes on to say "I think it's time to buy that stock,". Read the full article here.
Here are some key points for MS:
- Current share price: $16.47
- The 52 week range is $11.58 to $31.04
- Earnings estimates for 2011: 99 cents per share
- Earnings estimates for 2012: $2.42 per share
- Annual dividend: 20 cents per share which yields 1.4%
- Book value: $30.17
Financial Select Sector (NYSEARCA:XLF) is an ETF with diversified stock holdings in many large banks and financial stocks. This ETF holds stocks like JP Morgan, BofA, Citigroup, Wells Fargo (NYSE:WFC) and others. This is the safest way to play a comeback in the banking sector due to the diversification it offers.
Here are some key points for XLF:
- Current share price: $13.26
- The 52 week range is $10.95 to $17.20
- Earnings estimates for 2011: n/a
- Earnings estimates for 2012: n/a
- Book value: n/a
Data is sourced from Yahoo Finance. No guarantees or representations are made.
Disclosure: I am long BAC.