Cheap Stocks for 2014: The Best Buys in Banking

The market has been on an incredible run in 2013 and many investors have begun to question whether there are still any cheap stocks for 2014. Thankfully, there are three banking stocks that are still inexpensive.

Since Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) often inspire images of corporate greed and banking calamity, they remain cheap despite the fact that their stock prices have risen by 40%-plus since last year. And while Regions Financial Corporation (NYSE: RF  ) is lesser known, it is among the least expensive of the regional banks.

First, it's important to note that unlike most stocks, a glance at the price-to-earnings ratio of a bank won't provide that much insight into its value, largely because of the cyclical nature of the industry. Further, as a result of one-time charges stemming from settlements and fees, reported bank earnings can lead to misleading P/E multiples.

While those payouts are a very real loss and represent money that the company won't be able to return to shareholders, it can be argued that those charges will slow down soon and banks will continue down the road to recovery. As a result, perhaps maybe now more than ever, it is important to look at a bank's stock price relative to its tangible book value to get a clear picture of how cheap (or expensive) it is.

One way to think about tangible book value is the worth of the company that shareholders would receive if the firm were to liquidate. With banks this is important because it filters through all the noise to the true value available to shareholders.

Consider Bank of America, for instance. Its P/E ratio for the past 12 months stands at 23.8, versus peer Wells Fargo (NYSE: WFC  ) , which is well below that at 11.6. However when you look at price-to-tangible book value, the positions are flipped -- Bank of America stands at 1.2 versus Wells Fargo at 2.1.

Citigroup -- Price to Tangible Book Value: 1.0
Of the four biggest banks, Citigroup is actually the cheapest and among the least expensive in the entire banking industry. While it has had its fair share of difficulties, the bank has actually delivered solid growth since 2009, even when compared to more highly regarded peer JPMorgan Chase (NYSE: JPM  ) .

C Tangible Book Value (Quarterly) Chart

C Tangible Book Value (Quarterly) data by YCharts.

Although there are certainly reasons to remain cautious about Citigroup, the fact remains that it has done an impressive job growing the value available to shareholders, and it had improved its net income through the first nine months of the year in 2013 by 73% relative to last year (which was full of one-time charges). The reality that it is so cheap can make up for some of the questions surrounding it.

Bank of America -- Price to Tangible Book Value: 1.2
Bank of America is a touch more expensive than Citigroup, but a potential explanation is that despite all the legal troubles and issues that have surrounded it, it has actually done a better job at growing its book value over the same time period.

BAC Tangible Book Value (Quarterly) Chart

BAC Tangible Book Value (Quarterly) data by YCharts.

In addition, while the bank has been the poster child for mortgage malfeasance thanks to its acquisition of Countrywide, its underlying businesses have actually grown their net income by $1.1 billion, or 10% when compared to last year.

Question marks have clouded Bank of America for years, but the bank appears to be nearing the end of its own financial crisis and is poised for solid growth at a price investors can appreciate.

Regions Financial Corporation -- Price to Tangible Book Value: 1.4
While Regions is the most expensive of the three banks mentioned, it has a number of compelling things going for it. First, it has a commanding market presence in the three states where more than half of its deposits lie, holding almost 18% of the deposits in Alabama, Tennessee, and Mississippi. Its nearest competitor only has roughly 7%.

In addition to its market presence, it has also delivered resounding growth in one of the key bank profitability metrics -- net interest margin -- over the last year, especially when compared to the average for all banks.


Source: Company earnings reports and St. Louis Federal Reserve .

When you couple a modest valuation, commanding market leadership, and growing profitability, you can see why Regions is a compelling consideration.

Valuation is always an important thing to consider when investing in any company, and even though the market has been on quite a growth sprint in 2013, thankfully there are still bargains to be had.

Beyond the banks
While those are 3 cheap stocks for 2014, the reality is the market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!


Read/Post Comments (0) | Recommend This Article (4)

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.

Be the first one to comment on this article.

DocumentId: 2761403, ~/Articles/ArticleHandler.aspx, 4/19/2014 10:54:31 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement