Rising Star Buy: 6 Banks on Serious Sale

This article is part of our Rising Star Portfolios series.

The banking industry is complex, but my philosophy is to keep it as simple as possible. I monitor a group of more than 500 public banks, looking regularly for the ones on sale.

You can't know exactly what's on a bank's balance sheet, but you can get a good idea from past performance and bank-specific metrics. The way I like to cover myself for the uncertainty is to diversify.

There are periods when values are hard to come by, but the market's volatility has me seeing quite a few banks that meet my standards. I want to share a basket of them today, which I'll be buying tomorrow in my real-money portfolio.

Here they are, along with their market caps, price-to-tangible book values, and price-to-earnings ratios.

Bank Name

Market Capitalization
(in millions)

P/Tangible Book Value

P/E

JPMorgan Chase (NYSE: JPM  ) $141,925 1.2 7.8
Citigroup (NYSE: C  ) $92,849 0.7 9.7
Fifth Third Bancorp (Nasdaq: FITB  ) $9,704 1.0 10.4
KeyCorp (NYSE: KEY  ) $6,594 0.8 7.1
Huntington Bancshares (Nasdaq: HBAN  ) $4,515 1.1 11.4
Republic Bancorp (Nasdaq: RBCAA  ) $327 0.8 4.0

Source: Capital IQ, a division of Standard & Poor's.

When you look at this list, all are selling for reasonable-to-low price-to-tangible book values and P/E ratios. Each is also provisioning a reasonable amount for bad loans.

But otherwise, they're quite different. Looking at the extreme, JPMorgan is more than 400 times larger than Republic (on a market cap basis) and engages in a scale of derivatives and trading operations only Citi could dream of.

While JPMorgan and Citi are among the murkiest of the murky in terms of transparency, they're also among the first railcars in the too-big-to-fail train. Their size also offers them the clout to successfully lobby for what I call "prebailouts" ... regulations that favor (or at least fail to much hinder) larger banks.

Back to similarities, each of the banks above, except Republic, took TARP funds, but each has also paid them back with interest. And each, except Citigroup, pays a nontrivial dividend yield (led by Republic's 3.5%).

The bottom line
In the real-money portfolio I manage for The Motley Fool, you'll see a variety of companies, but my primary focus is building a portfolio of banks that are bought on the cheap. The better the quality of the banks, the more I'm willing to pay.

At the extreme, for example, my portfolio holds shares of Bank of America (NYSE: BAC  ) , which is unique among the American megabanks in that it still isn't turning a trailing-12-month profit. I would have bought more shares of Bank of America in this basket at today's depressed prices, but I've bought in twice already and don't want to overweight the portfolio in such a high-risk/high-reward opportunity.

Instead, tomorrow I'll reload on prior picks JPMorgan and Republic Bancorp and buy initial shares in the four others. To see my entire portfolio, click here.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).

Anand Chokkavelu personally owns shares of JPMorgan, Citigroup, and Republic Bancorp. The Motley Fool owns shares of Republic Bancorp and JPMorgan Chase. The Fool owns shares of and has opened a short position on Bank of America. 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 (4) | Recommend This Article (12)

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 August 10, 2011, at 12:13 PM, jimmy4040 wrote:

    The banks you name are good banks, but how will they make money going forward? Trading volume is down, the yield curve has flattened, the housing market is depressed. What is your profit model?

  • Report this Comment On August 10, 2011, at 2:41 PM, michjksn wrote:

    Thank you for sharing your research and buttressing one of my own findings (HBAN) that made it through my own screening process. Nice to see another's 'filtering parameters' resulting in an identical outcome. I opened an initial position today to the tune of 3500 shares @ 4.83 and @ 4.89. Between the institutional research, upgrades, insider buying, mgmt commentary/philosophy/performance and own analysis, I believe Huntington is a real sleeper/winner here for the second half at least...this sans a worldwide economic apocalypse of course. If that occurs, then nothing matters anyway right? GLTY Anand..

    Trying to stay positive in Texas...michjksn

  • Report this Comment On August 10, 2011, at 4:44 PM, TMFBomb wrote:

    @jimmy4040,

    I believe banks will continue to make money as they always have...borrowing at lower rates than they lend and pocketing the spread.

    The Citi's and JPMorgans of the world have more intricate business models than a plain vanilla bank, but at these prices I have enough faith in Wall Street's ability to find ways to make money (even if it involves another bailout eventually).

    Fool on,

    Anand

  • Report this Comment On August 11, 2011, at 1:35 PM, pondee619 wrote:

    "I would have bought more shares of Bank of America in this basket at today's depressed prices, but I've bought in twice already and don't want to overweight the portfolio in such a high-risk/high-reward opportunity"

    So, Bank of America is a buy? "I would have bought more shares of Bank of America..." if one is not already overweight the issue or did not already buy in twice?

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