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The Gist

Bank stocks have been whipsawed over the last year. After being beaten down to 52 week lows last year due to the eurozone debt debacle, they have seen resurgence in 2012. The positive outcome regarding the Fed's stress tests marked a significant milestone for the banks. The banks covered in this article have risen more than 26% on average year to date with 14% of the gain coming in the third quarter. Bank Of America (NYSE:BAC) is up the most with a 59% gain for the year while Deutsche Bank AG (NYSE:DB) is up the least with a 7.63% gain for the year.

I posit this is just the beginning for these banks, which present excellent buying opportunities. Even though these banks have had a significant rally this year, they are still trading near multiyear lows and considerably off their multiyear highs. Citigroup (NYSE:C) is trading over 14 fold below its split adjusted high of $500 per share in 2007 while Golden Sachs (NYSE:GS) has the least trading one fold below its 2007 high of $240 per share. With the banks trading many fold below their five year highs, the potential for them to double in value as global markets gain their footing is a definite possibility. Even if many of them did double from current levels, they would still be vastly below their all-time highs.

In the following sections I will present the positive macro catalysts for these banks and then perform a review of each bank's company specific fundamental and technical status to determine if the right time to buy is now.

The Details

I posit there are several macro reasons that will drive a rally in the banking sector. The major reason is the Eurozone is not going to fall apart. The Eurozone is taking the proper actions to calm its tumultuous financial markets. Recently, bond yields of certain Eurozone sovereigns have rocketed higher driving U.S. banks lower in sympathy with their European counterparts. Even so, that fact of the matter is the banks have worked diligently over the last two years to reduce their exposure to the sovereign debt issues. In fact, many banks stand to gain significant market share on a global scale. As the Eurozone fringe banks inevitably retract global credit lines to meet new requirements and focus capital and liquidity on the stabilization of Europe an incredible opportunity presents itself for Deutsche Bank and U.S. banks to step in and fill this void.

Regarding U.S. banks, they are well ahead of their European peers with regard to capital requirements. Many have already taken losses yet still have excess capital and reserves. The sector is flush with liquidity. Finally, the U.S. housing market is showing signs of life. All these signs of improvement bode well for U.S. banks.

Additionally, these banks have improving fundamentals and EPS growth projections. These banks are trading at low price-to-earnings multiples even when taking into account lower earnings expectations and are trading at approximately three to five multiples below normal. See summary chart below of the banks in question provided by Finviz.com.

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The Goods

Bank of America Corporation

BAC is up 59% year to date, yet is still trading four fold below its 2007 high of $45 per share.

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The company is trading 10% below its 52-week high and has 4% potential upside based on a consensus mean target price of $9.42 for the company. BAC was trading Monday at $9.12, up over 3% for the day.

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Fundamentally, BAC still has several positives. BAC insider ownership has increased by 66.39% over the past six months. The company has a forward P/E of 9.70. BAC is trading for 6.72 times fee cash flow. BAC has a net profit margin of 11.62% and a PEG ratio of 1.33. BAC is trading for approximately 40% of book value. EPS next year is expected to rise by 69%.

Technically, BAC is exhibiting positive characteristics. The stock broke out of a descending triangle to the upside at the beginning of August and fulfilled the coveted golden cross. This was extremely bullish. I went long BAC at this time. I have found the golden cross to be a key metric in picking winners.

The stock is still trading below 50% of its book value and the fundamental and technical picture is positive. The stock is a buy here. Layer in to the position in 25% traunches periodically to reduce risk.

Citigroup, Inc.

Citigroup is up 24.51% year to date, yet is still trading 14 fold below its 2007 split adjusted high of $500 per share.

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The company is trading 13% below its 52-week high and has 144% potential upside based on a consensus mean target price of $78.68 for the company. Citigroup was trading Monday at $33.31, up almost 2% for the day.

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Fundamentally, Citigroup has several positives. The company has a forward P/E of 7.27. Citigroup is trading for approximately half of book value. Citigroup insider ownership has increased by 20.56% over the past six months. The company has a PEG ratio of 1.03 and a net profit margin of 14.19%.

Technically, the stock looks great. It is in a well-defined uptrend. The stock has posted higher highs and higher lows since mid-July. It has been on fire so the recent period of back and filling was completely logical. If you look at the chart, Citigroup is about to fulfill the golden cross where the 50-day sma crosses above the 200-day sma. This is precisely the time to buy the stock. I will be going long very soon.

Just like BAC, Citigroup seems to have shirked off the bad news and is heading higher. The stock is still a buy here.

Deutsche Bank AG

DB is up 7.63% year to date, yet is still trading nearly threefold below its 2007 high of $145 per share.

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The company is trading 20% below its 52-week high and has 29% potential upside based on a consensus mean target price of $52.54 for the company. DB was trading Monday at $40.74, up almost 3% for the day.

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Fundamentally, DB has several positives. The company has a forward P/E of 6.14. DB is trading for approximately half of book value. DB pays a dividend with a yield of 2.33%. The company has a PEG ratio of 1.31 and a net profit margin of 9.62%.

Technically, the stock looks good. It is in a well-defined uptrend. The stock has posted higher highs and higher lows since late July. If you look at the chart, DB appears as though it will eventually fulfill the golden cross in the near future. The 50-day sma has begun to increase its rate of ascent as compared to the 200-day markedly. I would hold off on buying into this one until the golden cross is achieved. Give DB a little more time to prove itself.

The Goldman Sachs Group, Inc.

Goldman is up 27.24% year to date, yet is still trading one fold below its 2007 high of $240 per share.

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The company is trading 7% below its 52-week high and has 8% potential upside based on a consensus mean target price of $127.91 for the company. Goldman was trading Monday at $118.47, up over 4% for the day.

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Fundamentally, Goldman has several positives. The company has a forward PE of 9.06. Goldman is trading for 3.46 times free cash flow and approximately 75% of book value. EPS next year is expected to rise by 14%. Goldman currently pays a dividend with a 1.62% yield.

Technically, the stock looks great. It is in a well-defined uptrend. The stock has posted higher highs and higher lows since mid-July. It has been on fire so the recent period of back and filling was completely logical. If you look at the chart, Goldman recently fulfilled the coveted golden cross. This is precisely the time to buy the stock. Goldman is a buy right now.

Morgan Stanley (MS)

MS is up 11.67% year to date, yet is still trading over three fold below its 2007 high of $70 per share.

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The company is trading 19% below its 52-week high and has 19% potential upside based on a consensus mean target price of $19.97 for the company. MS was trading Monday at $17.04, up almost 2% for the day.

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Fundamentally, MS has several positives. The company has a forward PE of 8.58. MS is trading for 1.27 times free cash flow and approximately half its book value. EPS next year is expected to rise by 109.68%. MS currently pays a dividend with a 1.19% yield.

Technically, the stock looks good. It is in a well-defined uptrend. The stock has posted higher highs and higher lows since mid-July. It has been on fire so the recent period of back and filling was completely logical. If you look at the chart, MS is on track to fulfill the coveted golden cross as well. To reduce risk, I would hold off on buying this one until the golden cross appears more certain.

With the Facebook (NASDAQ:FB) debacle still fresh, who knows what obstacles lay ahead for the company? I would avoid the stock until further progress is made in regards to the unwinding of the Facebook IPO mess.

The Bottom Line

I believe the financial sector has significant upside potential as the issues of the Eurozone are resolved and fade from the forefront of investors' minds.

With the alarming retrenchment by banks across the globe, regulators may be set to ease stringent new capital rules. The new regulations, known as Basel III, which are set to start in 2013, may be revised. This should help out the banks tremendously. The two stocks to hold off on in the short term are Morgan Stanley and Deutsche Bank although I see them moving up in the long term as well. These stocks are trading at multiyear lows and many fold below their all-time highs making the possibility for them to double in the next few years even that much greater.

Could they go lower? Of course, but history shows the financials, like many sectors, go through periods of boom and bust. I am saying I believe we are emerging from a five year financial quagmire and these stocks have a tremendous amount of upside potential in the years ahead.

These are long-term investments. You can expect more volatility near-term for all equities; even so, I'm taking these bank stocks out of the penalty box. If you choose to start a position in any stock, I suggest layering in using quarter sized traunches at a minimum to reduce risk. Set a 5% trailing stop loss order to minimize losses even further if you wish.

Source: 5 Banks That Could Rally In The Coming Years

Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.