The Bank Stocks to Buy for 2011

The sector of the market that excites me the most for bargain-hunting is banking. The losses and dividend cuts of the last few years have a lot of investors running scared. But for those who can get past the initial flinching, there are serious opportunities out there.

To flesh out these opportunities, I asked two of my fellow bank analysts for the banks they think are buys at today's prices. After they share their favorites, I'll share mine.

Matt Koppenheffer, Fool contributor
Looking ahead to 2011, I think there are a lot of opportunities in banking. I've found myself being convinced by some compelling arguments that some of the bigger banks -- particularly the beleaguered Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) -- could be good investments. However, I generally like to avoid companies that spend too much time in the headlines.

Instead, I think investors that want to add banks to their portfolio can look toward two groups. First, there are the quality banks. These are banks that currently have lower levels of nonperforming assets, approach their business with a conservative eye, and, in many cases, are currently paying healthy dividends. Cullen/Frost Bankers (NYSE: CFR  ) and M&T Bank (NYSE: MTB  ) are among this group.

The other group you have to hold your nose a bit to handle. These are banks that have been battered by the recession and financial crisis and are still trading at failure-is-around-the-corner multiples, but that seem to have the wherewithal to pull themselves through. Marshall & Ilsley (NYSE: MI  ) is one of my favorite ideas in this vein. Though, nota bene, for investors that go this route, I strongly suggest that these are made as smaller positions and are grouped with other similarly beaten-down stocks.

Alex Dumortier, CFA, Fool contributor
"To the extent we have been successful, it is because we have concentrated on identifying one‐foot hurdles that we could step over rather than because we acquired any ability to clear seven‐footers." --Warren Buffett, on the success he and Charlie Munger have achieved at Berkshire Hathaway.

In the banking sector, there is a one-foot hurdle available for the stepping, but it's not a single stock. On Nov. 24, I suggested investors consider buying a basket of the shares of the nation's four largest commercial banks, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo (NYSE: WFC  ) . Owning this basket amounts to owning a leading, highly profitable share of the U.S. commercial banking industry and it can be had at a very reasonable price.

Since then, Goldman Sachs turned positive on financial stocks for the first time since 2008. From the date on which the idea was published through Tuesday, the basket is up 9.5% against just 3.6% for the S&P 500. I expect that outperformance to continue, with dividend increases in 2011 acting a catalyst; in my opinion, at least three of the four banks will receive authorities' authorization to raise their dividends next year, perhaps as early as the first half. The basket remains very cheap today on the basis of book value and earnings multiples – there is still time for investors to participate in this trade.

Anand Chokkavelu, CFA, Fool contributor
The banks I've been stalking recently have either been really big and scary or really small and solid.

Like Matt and Alex, I see opportunity in the big banks. But these are only for those who are comfortable with the risk that something terrible and ugly appears from their inscrutable balance sheets. I am, so I recently bought shares of Bank of America. That's my favorite big, scary bank at today's prices.

On the other side are small banks that stick to servicing Main Street (rather than playing Wall Street games). Many of them pay tasty dividends and never took much of a hit during the financial crisis. A quality one to look into is Bank of Hawaii (NYSE: BOH  ) . It's always a bit pricey by standard price-to-book ratios, but that's because its balance sheet is rock solid and it returns 18.9% on equity. If you're not familiar with returns on equity, that's a very impressive figure!

Bank of America may be able to start paying a real dividend again soon, and Bank of Hawaii already pays a 3.8% dividend yield. For even higher dividend yields, click here to check out our free report "13 High-Yielding Stocks to Buy Today."

Anand Chokkavelu owns shares of Bank of America, Citigroup, and Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value pick. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Bank of America, Berkshire Hathaway, and JPMorgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (57)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 16, 2010, at 5:32 PM, Mstinterestinman wrote:

    Bac is trading below both stated book and tangible Book value. If you look at historical earnings then include Merril and Countrywide and these segments repair themselves and the economy improves this a company worth easily 50 dollar a share plus at some point the dividend will be increased adding a added bonus.

  • Report this Comment On December 17, 2010, at 12:53 AM, xetn wrote:

    The only bank I am interested in is trying to figure how to short the Fed. The rest are not worth my time.

  • Report this Comment On December 17, 2010, at 1:07 AM, 11x wrote:

    Not surprising, another discussion on widely followed, widely publicized large cap banks such as BAC. I'm finding micro cap banks that are profitable, and trade at less than half tangible assets. These values just don't exist in large cap banks.

  • Report this Comment On December 17, 2010, at 2:54 AM, investchief wrote:

    I think Citigroup is due for a run this next year. Bullish pressure has been building up the last few weeks and I think it could go past $5 by end of 2011. C is almost fully free of goverment control, and portfolio managers are starting to realize the potential of citigroup and they are moving in.

    check out my investment blog: investchiefblog.com

  • Report this Comment On December 17, 2010, at 8:39 AM, jrod87 wrote:

    FBP!!!!!!! and UWBK! my 2 picks for 2011 and beyond. Real bargin hunters will agree..both at only 0.29-0.33$ a share ! BoYA Baby!

  • Report this Comment On December 17, 2010, at 12:05 PM, CEROGE wrote:

    BAC is not a good investment currently, I was a shareholder but after all the chaos I decided to sell it. I prefer to own BAC after wikileaks issues resolved.

  • Report this Comment On December 17, 2010, at 12:06 PM, SB11 wrote:

    Matt K., I actually ended up buying shares of Marshall & Ilsley last week. Looks like they just got aquired today by Bank of Montreal. What are your thoughts on the acquisition?

  • Report this Comment On December 17, 2010, at 12:12 PM, SB11 wrote:

    Actually, I'd be happy to hear any of the Fool's contributors thoughts on the M&I and Bank of Montreal merge. I mentioned Matt K. because M&I was one of his picks in this article.

  • Report this Comment On December 17, 2010, at 1:09 PM, TMFKopp wrote:

    @SB11

    Umm.... can I say that I'm disappointed? :)

    I had also recommended it earlier in the month (http://www.fool.com/investing/general/2010/12/03/5-beaten-do... and didn't end up getting the opportunity to buy it myself!

    BMO is probably getting a pretty sweet deal here, but I'm not sure how much M&I shareholders can really complain. I liked it because it was just trading so darn low, but the bank itself wasn't in stellar shape. Combining with BMO takes care of M&I's capital worries.

    Matt

  • Report this Comment On December 17, 2010, at 1:32 PM, FutureMonkey wrote:

    I could be wrong but don't banks usually trade below or near tangible book value. You simply can't use the same metrics for financial institutions as you would for say a large industrial company. Afterall, isn't the problem we had in 2007-2008 is that "tangible" book values reported were grossly mispriced and not supported by actual assets.

    I just don't trust banks to accurately report their assets to share holders (I trust Goldman Sachs even less than most banks). Too much opportunity to manipulate and obfuscate the books. They just aren't a shareholder friendly investing opportunity.

    As an individual investor, I think there are plenty of other opportunities out there. Even if the financial sector starts to take off again I won't actually lose money by skipping them if I invest in other more reliable companies I can better understand.

    If you believe in the broad recovery of the banking system and market caps of these companies, I'd go with the basket approach as recommended by author, but I'd even go further by simply ETFs were financials may be heavily weighted but not the full picture (something like a large cap, dividend ETF). There is no single bank that I'd look at today and consider owning outright.

  • Report this Comment On December 17, 2010, at 2:34 PM, TMFKopp wrote:

    @FutureMonkey

    I don't totally disagree with your sentiment on the banking industry. However, it's the prevalence of that view -- "Forget banks, I'm not touching them!" -- that I believe is creating opportunity in the sector. When you have lots of investors absolutely refusing to even bother with a particular sector, you have a lot more opportunity to find inefficiency.

    As to the tangible book value issue... It actually depends on the bank. In general, no, banks do not normally trade below TBV, but many banks tend to trade right around 1x their TBV. However, it really depends on the bank in question. Highly successful, efficient banks that produce better returns on their asset bases tend to trade at multiples of their TBV.

    The key with banks trading below TBV (or well below as was the case with M&I) is to try and figure out what the price implies in terms of further losses for the bank versus what makes reasonable sense given the details that are available on the bank's books as well as what levels of losses it's already experienced. In the case of M&I, it looked to me like the market was pricing in WAY more losses than looked reasonable.

    Matt

  • Report this Comment On December 17, 2010, at 2:54 PM, FutureMonkey wrote:

    Thanks Matt. I couldn't find an easy chart or report for historical pricing on the big banks. Would be nice to go back 20 years and see what the average price to TBV is for JPM, BAC, and Citi has been.

    I'd never advocate "Banks don't touch them ever again," but I'm not clever enough to be able to accurately value banks. Consequently, I opt for participation in financials as a sector in my indexed retirement portfolio rather than mixed in my individually held equities that I'm able to follow more closely.

    Would love to hear what your thoughts are on V, MA, AXP after the market slapped them around this week over the debt card fee limits.

    FM

  • Report this Comment On December 17, 2010, at 3:29 PM, TMFKopp wrote:

    "Would be nice to go back 20 years and see what the average price to TBV is for JPM, BAC, and Citi has been."

    Alas, I'm not sure how helpful this info would actually be. These banks have gone through so much change through that period that I'm not sure the numbers would be comparable.

    "but I'm not clever enough to be able to accurately value banks."

    Yeah, it's tough to get a really good handle on valuations.Two things to think about if you do decide to glance at banks. 1) The Buffett (or was it Munger?) approach that you don't need to be able to say that someone is 436 pounds to be able to say that they're fat. Some banks are just obviously cheap. 2) Reduce company-specific risk to an extent by buying in groups. Alex (above) recommended doing this with the big banks and I think there's opportunity to do it with some of the smaller really beaten-down banks.

    As to V, MA, and AXP... here's what I had to say yesterday: http://www.fool.com/investing/general/2010/12/16/visa-and-ma...

    The cap on the interchange fees would have little direct impact on the financials of the card network folks, but the bigger issue is how it impacts the business as a whole and whether the government decides to dig in with even more regulation in the sector.

    Matt

  • Report this Comment On December 19, 2010, at 6:07 PM, moseswillis wrote:

    take look at ACTC it for it to move

  • Report this Comment On December 21, 2010, at 11:16 AM, mikecart1 wrote:

    Bank of Hawaii? LOL! Now I've seen it all!

  • Report this Comment On December 22, 2010, at 12:25 PM, Pabio wrote:

    Anybody looked at Fifth-Third Bank? I bought in during the lows of the bad bank days and have done well over the last 2 years or so.

  • Report this Comment On December 28, 2010, at 9:57 PM, akbarcaskey678 wrote:

    @TMFKOOP

    You said take a look back 20 years at these banks and if you were too look @ valuations from back then, you wouldn't find much. You probably know this, but there was a bank called Continental Illnois that dominated the headlines. Anyway, Continential Illinois collapsed very similarly to how Bear Sterns collapsed in 2008 and that's actually were the term "too big to fail" was first incorporated. Illnois collapsed which help lead to the recession of the 1980s and give Citi and Bofa its dominance.

    My point is history seems to be repeating itself and if you bought Bofa or Citi you would have enjoyed the massive bull run of the 1990s. That's why I am long financials because after major recessions and when not if the banking system recovers, there are oppertunities for massive profits.

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9/2/2014 4:02 PM
BAC $16.27 Up +0.18 +1.12%
Bank of America CAPS Rating: ****
BOH $58.62 Up +0.57 +0.98%
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C $51.96 Up +0.31 +0.60%
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CFR $79.29 Up +0.69 +0.88%
Cullen/Frost Banke… CAPS Rating: **
MI.DL $0.00 Down +0.00 +0.00%
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MTB $124.41 Up +0.78 +0.63%
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WFC $51.57 Up +0.13 +0.25%
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