Beware of High-Flying Bank Stocks

Many investors have become enamored with bank stocks over the last few years, as shares in lenders like Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  )  have soared in the aftermath of the financial crisis. But are we now at the point where this should concern you? I believe the answer is yes.

It's important to recognize that the most recent crop of high-flying lenders have one thing in common: They're all at the bottom of the barrel when it comes to the quality of their operations.

Take a look at the heat map below, which sorts banks by shareholder return for different holding periods and then color codes it accordingly. In the second row down, for instance, you can see that shares of KeyCorp (NYSE: KEY  ) are up by 64% over the last year, 84% over the last two years, 67% over the last three years, and so on.

Two things should stick out when you look at this graphic.

First, highlighted by the yellow circle marked with a "1", is the fact that the best-performing bank stocks over the last one to five years have the worst long-term track records. Much of this has to do with the fact that these banks suffered the most from the financial crisis and, in many cases, egregiously diluted their existing shareholders.

But, and this is a critical point, the financial crisis didn't happen in a vacuum. That is to say, the lenders that fell for the siren song of subprime lending did so because of weak controls and a culture that espoused top-line growth over slow and steady prudent lending. Changing the latter is far easier said than done -- though you'd never hear this from the current crop of executives at these banks.

And second, though as a corollary to the first, is the fact that the best banks from a long-term perspective have all performed at the bottom of the heap over the last two years, if not more. This is highlighted by the large yellow oval marked with a "2."

When you take all of this into consideration, in turn, you'd be excused for concluding that the best-performing bank stocks of late are far from the types of investments you want to be holding for the long run.

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