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We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

Warren Buffett, the renowned contrarian investing expert who has made millions in the market purchasing unloved companies in out of favor sectors at rock-bottom values made this famous quote. I believe it is quite apropos at this juncture. I posit the banks are at an inflection point, and are about to make a major comeback once the calendar clicks over to 2012. Please review the following contrarian case for bank stocks, followed by five major reasons banks stocks are destined to double and a brief review of my top seven bank picks.

Contrarian Mindset

When I start feeling like there is no good reason to be in the market, and I should roll up the tent and sell out, I now know this is a signal to buy, not sell. This is how I’ve been feeling about the banks as of late. I say, why not take advantage of the value created by the current turmoil and start a position in the following bank stocks before the market sorts out the global debt issue and rebounds? After the economic storm clouds clear, (and they will because they always do) you will most likely have missed the move and be buying in at much higher prices.

The constant negative headlines out of the eurozone have ground fundamentally sound U.S. bank shares down by 50% or more in some cases this year and most are trading at vastly less than their tangible book values. Ironically, U.S. economic indicators are actually fairly good right now and many banks have projected EPS rates of 20% or better next year. I have been around long enough to know macro headline risk provides great opportunities to buy sound companies at discount prices. Market sentiment can and will turn on a dime -- mark my words. As we all know, in life, timing is everything, and the time is now to buy the following bank stocks.

Buying low is not an easy thing to do, I know, but if you have a long-term time horizon, you will most assuredly make money. Markets don’t stay down or up for long, or Wall Street wouldn’t make any money. The Wall Street traders thrive on volatility. Markets fluctuate on a continuum, and we are bouncing along the bottom of it for bank stocks right now -- ergo, it’s time to load up. The very bottom of the market, during March 2009, was the time to buy, but no one I knew was buying; everyone was running for the exits at the exact time they should have been piling in.

Warren Buffett invested $5 billion in Bank of America (BAC) recently. Bank of America announced the investment, declaring it would sell Buffett cumulative perpetual preferred stock, which pays an annual dividend of 6%, and give him a warrant to buy 700 million shares at roughly $7.14 each. Regardless of massive market losses year to date, Buffett says Bank of America is still a “strong, well-led company,” and he is “impressed with the profit-generating abilities of the franchise.”

Nevertheless, Buffett took a lot of heat for making this bold play. Most investors are steering exceedingly clear of financials now, especially Bank of America. I have a certain affinity for Buffett, the “Oracle of Omaha,” as I was born in the great "Gateway to the West" city myself. Furthermore, I am an experienced investor. I have been through several boom and bust cycles and learned that Buffett’s proverbs are words to live by, and will make you money. Now, we all know Buffett receives sweetheart deals not available to the average investor, nevertheless he was a little early on his BAC call and you can get in at a discount to even Buffett.

Top Five Reasons Why U.S. Banks Will Soar In 2012

  1. Banks are over sold and under owned on top of strong fundamentals which inevitably attracts value investors and leads to a reversion to the mean. The mean reversion strategy is based on the mathematical premise that all prices will eventually move back toward the mean or average return.
  2. Although the U.S. banks have been severely hammered mostly due to eurozone headline risk regarding sovereign debt defaults, U.S. banks actually have minimal exposure to this risk. BAC’s estimated Eurozone exposure is $100 million dollars while BAC has a $40 billion market cap, $30 billion in cash and is trading at half of tangible book value.
  3. U.S. banks are well ahead of their European peers in regards to capital requirements. Many have excess capital and excess reserves. The sector is flush with liquidity, capital and reserves.
  4. U.S. banks have improving fundamentals and EPS growth projections. U.S. bank earnings are up 40% this year and EPS growth rates are expected to come in at 20% next year.
  5. U.S. banks are trading at low price to earnings multiples even with taking in to account lower earnings expectations and are trading at approximately five multiples below normal.

Company Reviews

The following are severely oversold bank stocks I see as hitting rock bottom now and trending up in the coming months. These are speculative contrarian picks. The seven stocks in question are: Bank of America Corporation, The Bank of New York Mellon Corporation (BK), Citigroup, Inc. (C), The Goldman Sachs Group, Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS) and Regions Financial Corp. (RF).

Please review the following chart of their current performance followed by a brief description of each bank with a chart detailing specific bank fundamentals.

Current Performance Chart

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Bank of America Corporation, through its subsidiaries, provides banking and financial services to individuals, small- and middle-market businesses, corporations, and governments primarily in the United States and internationally.

Fundamental Statistics

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The Bank of New York Mellon Corporation, a financial services company, provides various products and services worldwide. The company’s Asset Management segment offers a range of equity, fixed income, cash, and alternative/overlay products, as well as distributes investment management products.

Fundamental Statistics

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Citigroup, Inc., a global financial services company, provides consumers, corporations, governments, and institutions with a range of financial products and services.

Fundamental Statistics

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The Goldman Sachs Group, Inc., together with its subsidiaries, provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide.

Fundamental Statistics

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JPMorgan Chase & Co., a financial holding company, provides various financial services worldwide. Its Investment Bank segment provides various investment banking products and services, including advising on corporate strategy and structure, capital-raising in equity and debt markets, risk management, market-making in cash securities and derivative instruments, prime brokerage, and research services serving corporations, financial institutions, governments, and institutional investors.

Fundamental Statistics

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Morgan Stanley, a financial holding company, provides various financial products and services to corporations, governments, financial institutions, and individuals worldwide.

Fundamental Statistics

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Regions Financial Corporation operates as the holding company for the Regions Bank that provides a range of commercial, retail, and mortgage banking services in the United States.

Fundamental Statistics

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Conclusion

A contrarian is one who attempts to profit by investing against the grain, to go against the crowd, because the crowd is usually wrong and always late. A contrarian believes that certain crowd behavior among investors can lead to exploitable opportunities. Pervasive cynicism about a stock or sector can drive the price so low that it exaggerates the investment's perils and belittles its future prospects. Identifying and seizing on these opportunities is a well-known investing tactic utilized by legendary investing experts such as Warren Buffett and Whitney Tilson. I believe these bank stocks may present such an opportunity.

Although Fitch Ratings, the third-biggest of the major credit rating agencies, late Thursday downgraded Goldman Sachs, Deutsche Bank and five other large banks based in Europe and the United States, citing "increased challenges" in the financial markets, I see this as a buying opportunity. Fitch is chiming in exceptionally late and offers no new information the market hasn’t already baked in to current price levels.

When the eurozone gets its act together and the global economy achieves viable economic traction, you can kiss the current share prices goodbye. I envision a day in the not-too-distant future where we will look back at current bank price levels in awe of the amazing values currently presented.

Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security.

Source: 7 Oversold Bank Stocks Destined To Double In 2012