Big Five Bank Stocks Undervalued: Time to Nibble

The euphoria surrounding this stock market has not brought every sector along to new highs. In fact the major US banks have vastly under-performed, being flat to down 10% year-to-date. The major banks include Bank of America (BAC), Citigroup (C), Washington Mutual (WM), Wachovia Bank (WB) and Wells Fargo (WFC). All five have interesting prospects once the sub-prime mortgage issue is put to bed.

The first quarter results for all five major banks were good to slightly better than expected. The solidity of the earnings came from fee income. The collective five did raise their respective reserve requirements to absorb sub-prime mortgage delinquencies. Washington Mutual, Wells Fargo and Bank of America announced aggressive plans to manage potentially difficult mortgage accounts, even to the point of re-financing the loans. The strategy is a smart one as minimizing the exposure to sub-prime should help accentuate the other, more profitable aspects of the business.

This week will bring about the second quarter results for the major five banks. The sub-prime mortgage issue will have further clarity and direction. All five banks will more than likely report in-line results with solid guidance for the third and fourth quarters. The dividend yields are a solid 3.2% to 5.2%, which provides downside protection for these bank stocks.

The patient investor should begin to nibble away and buy these five major US bank stocks. The dividend coverage is excellent as is the prospect of raising those dividends. As the mortgage market is tempered and solidified, these stocks have tremendous potential to rise in value. All five trade in a tight PE range of 10-12 times 2007 expected earnings, a good 30% discount to the S&P 500 PE rate of 16 times 2007 earnings.

WFC/BAC/WM/WB/C 1-yr comparison chart

Disclosure: none