This article is part of our Rising Star Portfolios series.
I've been waiting patiently to load up on stocks in my bank-centric real-money portfolio. With the recent market pullback, though, I'm seeing quite a few banks that are looking attractive. You can see the ones I've already bought by clicking here.
Tomorrow, I'm adding five more.
Two high-quality banks I've been waiting for
The first two banks, Wells Fargo (NYSE: WFC ) and Bank of Hawaii (NYSE: BOH ) , have been on my watchlist for quite some time. I haven't pulled the trigger in the past because they always seem to trade at premiums. BB&T (NYSE: BBT ) and US Bancorp (NYSE: USB ) have also been in this boat.
Don't get me wrong. Some premiums are justified for each of these banks because they have historically generated major returns on their equity. In other words, they have traded at high multiples on their equity because they earn more money per dollar of equity than most banks.
Today, none of these banks fully meets my stringent numerical tests, but I'm not a total slave to the numbers when the quality of a bank is high enough. Both Wells Fargo and Bank of Hawaii are finally cheap enough to buy today.
Wells Fargo is the only one of the megabanks that pretty much keeps its hands out of Wall Street affairs. However, it's not without danger. It's still in the process of fully integrating its financial crisis purchase of Wachovia, a bank that didn't enforce Wells' higher-quality lending standards. To put it nicely. Yet I believe that Wachovia in the hands of Wells' management is more opportunity than danger. A few years from now, I'm guessing we'll look back at the deal as a brilliant bargain purchase.
Speaking of bargain purchases, Wells is now trading near book value, a sight that's rarely seen. Before the financial crisis, that didn't happen (at least not back to 1994, where my data stops). Only during the market lows in 2009 were prices cheaper.
As for Bank of Hawaii, we value investors talk about moats a lot. Well, Bank of Hawaii's moat is kind of literal inasmuch as the Pacific Ocean protects it from expanding foes. The proof is in the numbers, though. I get excited when I see returns on equity north of 10%. A few years ago Bank of Hawaii hit 25%! Lest we chalk that up to the housing bubble, its current return on equity is still at 16%. To put those numbers in perspective, in the last 10 years, Wells was returning around 19%-20% at its height and returns 11% now.
Three banks that pass the test
In addition to the two watchlist banks above, I'm going to buy three more banks that look good based on the numbers.
- PNC Financial (NYSE: PNC ) : A Pittsburgh-based bank one tier below the megabanks in size. The numbers that pop out for PNC are its P/E ratio of seven and its dividend yield of 3%.
- FirstMerit (Nasdaq: FMER ) : An Akron, Ohio-based bank that does a good deal of commercial lending. Besides its history of conservative lending, its 5.3% dividend yield is quite nice.
- International Bancshares (Nasdaq: IBOC ) : Usually when you see a bank trading below tangible book value, there's some immediate ugliness present. You can't see it in this Laredo, Texas-based bank's nonperforming loans or assets. No, the red flag here is that International Bancshares still owes Troubled Asset Relief Program money (i.e., around $200 million in bailout money to the government). But given its history of firm profitability and strong capital ratios (even sans the TARP money), I'm willing to believe International Bancshares is keeping the loan strategically rather than out of need. And I believe International Bancshares is still cheap after factoring in its eventual TARP payback. We shall see.
5 banks to buy
I'll be adding each of these banks to my real-money portfolio tomorrow. If you're bank-inclined, each is worthy of a second look.
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).