Stocks that underperform in one year often turn out to be great investments in the subsequent year or two. This often is the case because investors tend to get too pessimistic and overlook the positives. It also occurs because investors often capitulate and sell their losing stocks in November and December in order to harvest tax-loss benefits.
This is a good time to take a closer look at some bank stocks because the banking sector has been one of the worst-performing in 2011. Many investors have given up on bank stocks due to concerns that new regulations, and mortgage losses will crimp profits forever. There are also contagion fears in which a European bank failure could spread massive losses to the banking system and economy around the world.
We know all these negatives, and expectations are low. This could be a classic buying opportunity in which many investors might be wishing they had bought bank stocks at the height of the pessimism that exists now. With so few even considering the positives for this sector, banks might be the ultimate contrarian play. Here's a number positive factors to consider for banks:
- If elected, a Republican President in 2012 would be hugely positive for the share price of all financials, especially since a number of Republicans have said they would work to repeal the Frank-Dodd Act, which some believe has punished and over-regulated the financial industry.
- U.S. banks are getting more deposits because they are viewed as safer than European banks. They are also buying assets from European banks at fire-sale prices.
- Banks are raising fees to improve profits, but now they are doing it more carefully and quietly. It will take time for banks to find new profit centers to replace the ones that have been reduced due to regulations and the weak economy, but over time they will find a way.
- Even though the headlines only seem to indicate gloom and doom, there have been some economic statistics that indicate things are improving in certain sectors. Unemployment claims recently fell to a 7 month low. A recent article states: "A gauge of U.S. home builders' sentiment rose to the highest level in 18 months during November as builders started to regain confidence in a troubled part of the economy. The National Association of Home Builders said Wednesday its housing market index surged to 20 from a downwardly revised 17 in October, reaching its highest point since May 2010.
- Less market and European uncertainty could boost values considerably. These stocks have low valuations when considering book value and price to earnings ratio. Banks are a leveraged play on the U.S. economy. When the economy improves, banks will benefit and earnings will increase.
- The sector is under-owned. Imagine how many investors and hedge funds will be looking to start or increase exposure to the industry once the negative headlines fade over time.
- Tax loss selling is probably further depressing this already weak sector, but that means major bank stocks could rebound in January when tax loss selling is over.
Here are some major bank stocks that could double in 2012:
Bank of America (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. BofA has been making tough choices, and has taken steps for a turnaround including raising capital, and announcing new fees to boost profits. Management needs to work on improving credibility and that could boost the share price over time. Time is on Bank of America's side, because as time passes the mortgage losses will diminish and the real estate crisis will as well.
Here are some key points for BAC:
- Current share price: $5.31
- The 52-week range is $5.13 to $15.31
- Earnings estimates for 2011: 1 cent per share
- Earnings estimates for 2012: 98 cents per share
- Annual dividend: 4 cents per share, which yields 0.7%.
Citigroup, Inc. (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 watch this stock for signs of a bottom, and average in over time. 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. Once the European debt crisis is resolved, I think this stock will be able to move much higher.
Here are some key points for C:
- Current share price: $24.46
- The 52-week range is $21.40 to $51.50
- Earnings estimates for 2011: $4.08 per share
- Earnings estimates for 2012: $4.44 per share
- Annual dividend: 4 cents per share, which yields 0.2%
Financial Select Sector (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 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: $12.08
- The 52-week range is $10.95 to $17.20
- Earnings estimates for 2011: n/a
- Earnings estimates for 2012: n/a
JP Morgan Chase (JPM) is one of the largest banks in the United States. JPM is also one of the best managed banks in the market and has less risk to mortgage exposure compared to other major banks. This stock looks very undervalued for long term investors and trades for less than 7 times 2012 earnings. It also trades below the book value of $45.95. Because this company is viewed to have less risk with mortgage exposure and excellent management, it might be the best way to play a rebound.
Here are some key points for JPM:
- Current share price: $29.41
- 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 3.3%
Morgan Stanley (MS) is a leading investment bank. This stock is trading at about 6 times 2012 earnings, and well below book value, which is $31.29. 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."
Here are some key points for MS:
- Current share price: $13.52
- The 52-week range is $11.58 to $31.04
- Earnings estimates for 2011: $1.58 per share
- Earnings estimates for 2012: $2.13 per share
- Annual dividend: 20 cents per share, which yields 1.4%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long BAC.