The banking sector offers one of the few places where investors can find bargains nowadays. The reason is simple: While the broader market has gone on to record highs, many bank stocks continue to trade for less than their pre-financial crisis valuations.
At the same time, however, not all banks are equally attractive. Some don't yield enough to satisfy dividend investors, while others aren't cheap enough to entice value investors. With this in mind, the two bank stocks that I think are buys in September cover both of these bases.
Dividend investors: Wells Fargo
For dividend investors, I'd encourage you to take a look at Wells Fargo (WFC -0.76%). This is one of the best run banks in the country, tracing its roots back to the California Gold Rush of the mid-1800s.
It's a bastion of profits and stability. Other than U.S. Bancorp, a regional bank based in Minneapolis, no other big bank is as profitable as Wells Fargo.
Over the past 12 months, the California-based bank generated a 13% return on equity. That's less than U.S. Bancorp's 14.4%, but well over most others. The average on the KBW Bank Index, which contains 23 large publicly traded bank stocks, is 8.8%.
Just as important, Wells Fargo has a demonstrated history of earning a respectable profit through all stages of the credit cycle. At the cycle's trough during the financial crisis, for instance, when many of its peers were recording billions of dollars' worth of losses, Wells Fargo earned a profit every year and was flush enough that it could acquire its larger competitor, Wachovia, without the government's help.
Add to this the fact that Wells Fargo's stock yields 3.1%, compared to the average on the S&P 500 of 2.1%, and it'd be hard to find a better bank stock for dividend investors to buy in September.
Value investors: Bank of America
For value investors, I'd encourage you to take a look at Bank of America (BAC -1.32%). This is not one of the best run banks in the country, but it is one of the cheapest.
Bank of America's shares trade for a 32% discount to book value. And, mind you, that's after climbing 11% in August.
Its paltry valuation reflects bank of America's paltry profitability. While the typical bank strives to earn 10% or more on its equity each year, Bank of America's came in at only 6.2% over the last 12 months. That performance has been the rule, not the exception at the Charlotte, North Carolina-based bank since 2008.
Despite that, there's a strong case to buy Bank of America's stock based on its valuation. Consider this: If interest rates rise over the next year, which they very well could, then Bank of America will earn billions more in profit. And if it earns billions more in profit, then its shares will reflect that.
Indeed, it's less a question of if Bank of America will eventually trade for 1.0 or more times book value, and more a question of when that will happen. And given the 30% upside baked into that, I'd say it's a pretty attractive stock for value investors.