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The Gist

These bank stocks are trading at an extreme discount to the historical valuations based on an unprecedented downturn in global growth. The downward spiral has been fashioned by a diverse set of macroeconomic and geopolitical dynamics influencing the markets. The global predicament has been on a scale the world hasn't seen in a lifetime. 2008's so-called Great Recession's only peer seems to be the Great Depression of the 1930s.

You would think that some fantastic buying opportunities have been created, and you would be right. All of the stocks in this article are down one to over tenfold and are currently trading near multi-year lows. Nevertheless, we may have just seen the bottom based on the recent performance of these stocks.

The fact that these stocks are down significantly from their multi-year highs leads me to believe when the market recovers, they could easily double. Part of it is the math involved. If you buy a stock after it has lost 50% of its value and it recovers to its former level, you will essentially have a 100% gain or a double. As stated earlier, most of these stocks have lost vastly more than 50% over the last few years making a double that much more easily attained.

Moreover, it appears we may be at an inflection point. Often, this is precisely the time to pick up shares in out of favor stocks. The Dow has topped 13,000 and is trading at multi-year highs. The spike in gold is telegraphing the Federal Reserve, the ECB and other global central banks will provide further monetary stimulus to revive the global economy.

The Premise

I posit there are two major factors that will drive a rally in the banking sector. The major reasons are the Eurozone is not going to fall apart and the U.S. housing market is recovering.

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 U.S. banks to step in and fill this void. U.S. banks 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.

The other primary catalyst for these banks is the U.S. housing market recovery. U.S. banks should benefit greatly as the housing market turns the corner, which appears to be happening now. The U.S. housing market is finally showing signs of life. This bodes well for U.S. banks.

The Goods

These banks have improving fundamentals and are all trading for less than book value. These banks are trading at low price-to-earnings multiples even when taking into account lower earnings expectations and are all up significantly this year. See summary chart below of the banks in question provided by Finviz.com.

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American International Group, Inc. (AIG)

AIG is up 54% for the year, yet is still trading vastly below its 2007 split adjusted high of $1200 per share. The company is trading 1% below its 52-week high and has 8% potential upside based on a consensus mean target price of $38.38 for the company. AIG was trading Thursday at $35.68, up almost 1% for the day.

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Fundamentally, AIG has several positives. AIG insider ownership has increased by 37.16% over the past six months. The company has a forward P/E of 10.19. AIG is trading for 10 times free cash flow. AIG has a net profit margin of 33.24% and a PEG ratio of .21. AIG is trading for approximately 59% of book value. EPS is up 30% quarter over quarter.

Technically, AIG looks good. The stock has been in a steady well defined uptrend all year. The coveted golden cross, where the 50-day sma crosses above the 200-day sma, was fulfilled earlier this year. I have found the golden cross to be a key metric in picking winners. The stock just ripped higher in the past few days and is trading approximately 5% above the 50-day sma currently. This is a breakout above the highs of the year.

Bank of America Corporation (BAC)

I am long BAC. BAC is up 68.59% for the year, yet is still trading four fold below its 2007 high of $45 per share. The company is trading 7% below its 52-week high and has 1% potential upside based on a consensus mean target price of $9.45 for the company. BAC was trading Thursday at $9.34, up 1.41% for the day.

(click to enlarge)

Fundamentally, BAC has several positives. BAC insider ownership has increased by 66.39% over the past six months. The company has a forward P/E of 10.26. BAC is trading for 7.11 times free cash flow. BAC has a net profit margin of 11.62% and a PEG ratio of 1.41. BAC is trading for approximately 43% of book value. EPS next year is expected to rise by 89.58% and the company pays a dividend with a yield of .43%.

Technically, BAC looks good. The stock broke out of a descending triangle to the upside at the beginning of August. The coveted golden cross, where the 50-day sma crosses above the 200-day sma, was fulfilled earlier this year. I went long BAC at this time. I have found the golden cross to be a key metric in picking winners. The stock is trading 10% above the 50-day sma currently. BAC is a steal at these levels. I'm staying long.

Citigroup, Inc. (C)

Citigroup is up 35.16% for the year, yet is still trading 14 fold below its 2007 split adjusted high of $500 per share. The company is trading 8% below its 52-week high and has 117% potential upside based on a consensus mean target price of $76.19 for the company. Citigroup was trading Thursday at $35.52, up over 1% for the day.

(click to enlarge)

Fundamentally, Citigroup has several positives. The company has a forward P/E of 7.89. Citigroup is trading for 57% of book value. Citigroup insider ownership has increased by 18.13% over the past six months. The company has a PEG ratio of 1.12 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 just fulfilled the golden cross where the 50-day sma crosses above the 200-day sma. This is precisely the time to buy the stock. The stock is still a buy here.

The Goldman Sachs Group, Inc. (NYSE:GS)

Goldman is up 36.55% year to date, yet is still trading one fold below its 2007 high of $240 per share. The company is trading 4% below its 52-week high and has 5% potential upside based on a consensus mean target price of $127.73 for the company. Goldman was trading Thursday at $121.99, up 1.59% for the day.

(click to enlarge)

Fundamentally, Goldman has several positives. The company has a forward PE of 9.72. Goldman is trading for 3.71 times free cash flow and approximately 81% of book value. EPS next year is expected to rise by 14%. Goldman currently pays a dividend with a 1.51% 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 19.15% year to date, yet is still trading over three fold below its 2007 high of $70 per share. The company is trading 15% below its 52-week high and has 12% potential upside based on a consensus mean target price of $20.04 for the company. MS was trading Thursday at $17.86, up almost 3% for the day.

(click to enlarge)

Fundamentally, MS has several positives. The company has a forward PE of 9.11. MS is trading for 1.36 times free cash flow and approximately half its book value. EPS next year is expected to rise by 104.17%. MS currently pays a dividend with a 1.12% 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. I plan on going long Friday prior to earning due out Monday the 15th.

The Bottom Line

I posit this is just the beginning for these banks. They present excellent buying opportunities. Even though these banks have had a significant rally this year, they are still trading near multi-year lows and considerably off their multi-year highs. With the banks trading many times below their all-time highs, the potential is great for them to rebound significantly from current levels as the markets gain their footing.

Markets incessantly gyrate, the only constant is the fact that they have always gone up over the long haul. These are long-term investments. If you try to trade the market during these volatile times, you will most certainly get crushed. The risk reward ratio for long position in these bank stocks is currently favorable. The only caveat is this is a long term investment, not a trade. There will be more volatility for these stocks going into the end of the year.

If you choose to start a position in any stock, I suggest layering in a quarter at a time at a minimum to reduce risk and setting a 5% trailing stop loss to minimize losses even further if you wish.

Disclosure: I am long BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.

Source: 5 Vastly Undervalued Banks Offering An Unprecedented Buying Opportunity