This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

It may not be the biggest, but...
When thinking of investing in banking stocks these days, who comes first to mind? Chances are, if you think bank stocks are cheap and worries over Europe overblown, your first instinct is to pick up a few shares of one of the megabanks -- Citigroup (NYSE: C  ) or Wells Fargo (NYSE: WFC  ) , perhaps. JPMorgan Chase (NYSE: JPM  ) , or even Goldman Sachs (NYSE: GS  ) . But according to Goldman Sachs, a better idea might be to avoid "the usual suspects" altogether, and instead consider a smaller bank with limited Europe risk.

Specifically, Goldman suggests investors take a good hard look at Regions Financial (NYSE: RF  ) , a regional bank with real potential.

...it's the best of the rest
In an upgrade picked up by StreetInsider.com yesterday, Goldman explains why it thinks Regions is a "buy" at today's share price of $6 and change -- and a good bet to hit $8 within the next 12 months. Right now, investors are still concerned that Regions has too much exposure to large mortgage loans, and may have trouble growing its loan book as it works off problematic commitments of years past. And yet, according to Goldman, Regions is showing "improving fundamentals" that could get even better as the recovery in housing in the U.S. Southeast gains steam.

Revenues last quarter improved 29% at Regions, which is a better number than any of the megabanks can boast. Indeed, last quarter both Goldman and Citigroup saw their revenues decrease, while even JP and Wells were held to mere single-digit revenue growth. Profits-wise, Regions nearly tripled its per-share earnings in the fiscal first quarter, and analysts expect it to grow profits to $0.60 per share this year... then grow that number 20% in 2013.

Despite all this good news, Regions shares currently sell for just 8.2 times consensus projections of next year's profits. That's not much of a premium compared to the forward P/E of 6 at Citi, 6.4 at JP, or 7.2 at Goldman. And Region's actually cheaper on a forward P/E basis than is Wells Fargo (8.6).

Why so cheap?
Regions' low valuation relative to forward earnings looks especially attractive in light of the company's focus on U.S. banking, and its regional specialization in the Southeast. This limits the company's exposure to potential derivatives blowups such as the one that cost JPMorgan at least $2 billion last month, and to Europe's debt crisis more generally.

But as Goldman points out, even among regional banks that are insulated from such concerns, Regions looks cheap. As a group, says Goldman, such banks are currently selling for roughly 9.5 times forward earnings -- meaning Regions sells for about a 14% discount to its peers.

Sound like a good deal to you? It does to me -- and Regions isn't the only bargain in banking stocks today. Read our new free report on the industry, and find out which banking stocks "only the smartest investors are buying."