7 Ridiculously Cheap Bank Stocks

Contrarian investors make fortunes turning lemons into lemonade. At the moment, the world's best investors are piling into bank stocks, even though Europe is in free fall and we're on the brink of a second recession. If you're inclined to join the market in making the best of a grim situation, here are seven banks whose shares look very appealing.

Banks are on sale!
After plummeting in early August, bank stock prices have yet to recover. The SPDR KBW Bank ETF, which traces the performance of publicly traded bank stocks, has fallen more than 15% since Aug. 1. The picture gets even grimmer if you look at its 27% year-to-date decline.

Source: Yahoo! Finance.

The seven bank stocks I'm watching followed suit. Regions Financial (NYSE: RF  ) , a regional bank with 1,800 branches located primarily in the South, led the way in terms of poor stock performance since Aug. 1. Synovus Financial (NYSE: SNV  ) , a smaller regional bank headquartered in Georgia, took the cake for year-to-date poor performance, and for distance from its 52-week high. And Bank of America (NYSE: BAC  ) , my favorite in terms of value, came in second across the board.

Bank Stock

Performance Since Aug. 1

Performance YTD

52-Week High

Regions Financial

(35%)

(45%)

(51%)

Synovus Financial

(25%)

(47%)

(56%)

Bank of America

(28%)

(47%)

(55%)

SPDR KBW Bank ETF

(16%)

(27%)

(33%)

BB&T (NYSE: BBT  )

(17%)

(19%)

(28%)

US Bancorp (NYSE: USB  )

(14%)

(18%)

(23%)

Wells Fargo (NYSE: WFC  )

(14%)

(23%)

(30%)

New York Community Bancorp (NYSE: NYB  )

(8%)

(31%)

(32%)

Source: Yahoo! Finance and Finviz.com.

But are they cheap?
Investors use the price-to-book ratio to determine a bank's value. This ratio compares the price of a bank's shares to the per share value of its equity -- i.e., book value.

A ratio of 1.5 is normal. A ratio of 1 means the bank is worth the value of its equity, giving no credit for any kind of franchise value. And ratios either above or below these benchmarks suggest quality or distress, respectively. Though, as a general rule, I prefer the industry adage: "Buy at half and sell at two."

All seven of the banks I'm watching fall well below the 1.5 benchmark. Six trade for less than book value. And three trade for less than half of that! It's for this reason, in turn, that my favorites are the three in the latter category: Regions Financial, Bank of America, and Synovus Financial.

Source: Finviz.com.

So should you buy?
I think there's a killing to be made among financial stocks, as even the most stable among them currently trade below book value. This opinion, moreover, seems to be shared by investing greats like John Paulson, Warren Buffett, and Bruce Berkowitz, who've all moved into this sector over the past few years.

Whether you should buy into it now, however, is a question of personal outlook and risk tolerance. The current valuations are ridiculous, which explains my position in Bank of America. But I'm reserving capital in case they decline further following a second recession, heightened liability from mortgage-backed securities, and/or an increasingly likely default in Greece.

So...
I recommend you add these banks to your watchlist and check in on them regularly. There's a strong likelihood that many financials will continue to deteriorate. However, a few cheap bank stocks should be major outperformers over the coming years. Click here to follow the contenders above on your free, personalized watchlist.

Fool contributor John Maxfield owns shares in Bank of America. The Motley Fool owns shares of Bank of America. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. 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.

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  • Report this Comment On September 15, 2011, at 5:40 PM, Pennyperson wrote:

    I agree. RF alone is trading @ near 100% below book value and WFC is looking nice too.

  • Report this Comment On September 16, 2011, at 2:11 PM, pryan37bb wrote:

    So if BAC's P/B is about 0.3, and 1.5 is considered the average, then does that mean you expect a 400% return before the bank is fairly valued, and then it'd be closer to 600% if you plan to sell at 2 as you wrote in the article? (Assuming no change in book value)

  • Report this Comment On September 17, 2011, at 11:42 AM, SUPERMANSTOCKS wrote:

    SNV should be at least $5 a share and its less than $2! Look at the books and the rest will tell you what you need yo know. I own and will be buying more

  • Report this Comment On September 17, 2011, at 7:00 PM, Pennyperson wrote:

    Actually (after looking into this further) fair book value on RF is $10.00 plus according to my calculations. The euro crisis could drive the stock lower; but you’ve hit the nail on the head with this one -Ridiculously cheap… 'NOPE'….it’s ridiculously VERY cheap.

    This is a no brainer and full disclosure I own a CHUNCK of it. Their profitable, management has turned this around and earnings estimates have been revised upwards. I’m really surprised at this price someone hasn’t swept them up for a buy out.

    Just my two cents

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Related Tickers

4/16/2014 4:02 PM
BAC $16.13 Down -0.26 -1.59%
Bank of America CAPS Rating: ***
BBT $39.34 Up +0.19 +0.49%
BB&T Corp CAPS Rating: ****
NYCB $16.18 Up +0.23 +1.44%
New York Community… CAPS Rating: ****
RF $10.34 Up +0.07 +0.68%
Regions Financial… CAPS Rating: ***
SNV $3.29 Up +0.06 +1.86%
Synovus Financial… CAPS Rating: ***
USB $40.47 Down -0.54 -1.32%
US Bancorp CAPS Rating: ****
WFC $49.09 Up +0.31 +0.64%
Wells Fargo CAPS Rating: ****

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