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Banks have been by far the poorest performing sector for more than a year. However, during the last couple of days several things have happened in succession that lead me to believe they could be close to a bottom.

  1. Central Banks have acted in coordination to provide liquidity for the global financial system.
  2. Dick Bove made a very interesting point this morning on CNBC that the U.S. Banks are benefiting greatly with new deposits and customers from institutions and individuals fleeing the European banks.
  3. S&P downgraded 15 U.S. Banks. Given the accuracy of the rating agencies over the past half decade, this may be a great sign of a bottom.
  4. Barney Frank (The scourge of the banks and protector of Fannie Mae and Freddie Mac) announced he will not seek re-election.

Here are four major banks selling way below book value with the potential to at least double in the next 12-18 months with any improvement in U.S. economy and investor sentiment. If you believe bankruptcy for the major banks has now been taken off the table, some of the major banks look like great buys for long term investors. Given the potential of a huge price spike in bank stock prices if things just improve a bit given all the bad news already priced into their stocks, a unique option strategy might be appropriate for more aggressive investors.

Bank of America (NYSE:BAC)

  • Price to Book Value: .24
  • Forward Earnings: 5.4
  • 52 Week High: $15.31
  • Consensus Price Target: $9.76
  • Long term option strategy: Sell the Jan 13 2.50 puts and buy the Jan 13 10 calls for zero net cost.

Citigroup (NYSE:C)

  • Price to Book Value: .42
  • Forward Earnings: 6
  • 52 Week High: $51.50
  • Consensus Price Target: $43.18
  • Long term option strategy: Sell the Jan 13 13 puts and buy the Jan 13 45 calls for a net credit of 27 cents.

JPMorgan Chase (NYSE:JPM)

  • Price to Book Value: .62
  • Forward Earnings: 6.1
  • 52 Week High: $48.36
  • Consensus Price Target: $46.67
  • Dividend Yield: 3.4%
  • Long term option strategy: Sell the Jan 13 20 puts and buy the Jan 13 40 calls for a net credit of 65 cents.

Morgan Stanley (NYSE:MS)

  • Price to Book Value: .43
  • Forward Earnings: 6.6
  • 52 Week High: $31.04
  • Consensus Price Target: $23.38
  • Long term option strategy: Sell the Jan 13 8 puts and buy the Jan 13 22 calls for a net credit of 10 cents.
Source: Are The Major Banks Near A Generational Bottom?