3 Profitable Investment Signs You Can Bank Onhttp://www.fool.com/investing/general/2012/11/27/3-profitable-investment-signs-you-can-bank-on.aspx Kevin Chen
November 27, 2012
"Be fearful when others are greedy and greedy when others are fearful." -- Warren Buffet
The financial sector is a scary place for Institutional investors. Banks are reorganizing business units, regulations are increasing, and the economy is weak. Luckily for you -- the individual investor -- the time is ripe. Banks still trade at all-time lows, but are much stronger than they were before the crisis. Before the financial sector becomes "hot" again, here are three signs you need to know to pick the best investment.
1. Price-to-book ratio less than 1
Yet one thing is for sure: On a price-to-book basis, banks look cheap.
Though many investors swear by analyzing the company's price-to-earnings ratio, smart investors understand that the price-to-book ratio is better for banks.
All companies borrow and raise money (liabilities) to make more money (assets). However, banks are special -- they don't invest their money into a tractor, furnace, or semiconductor factory. Banks borrow a dollar to lend that dollar out at a slightly higher interest rate. That means a bank's assets and liabilities are both cold, hard cash. And cash is more easily valued than a factory. Since book value is the difference between total liabilities and total assets, the price-to-book ratio is a better signal of a banks' value.
Now, analyzing the above chart, we can see that four out of the five featured banks seem like great deals. At a P/B ratio of 1.03, investors are paying for just $1.03 for every dollar of Huntington Banc's book value. That's like paying a baker $1.03 for a pie that cost $1 to make.
Better yet, three of the banks seem like complete steals! With a P/B ratio below $1, investors are paying just $0.78 for a $1 piece of Zions' pie.
2. Debt-to-equity less than 10, preferably lower