The sector of the market that excites me the most for bargain-hunting is banking. The losses and dividend cuts of the last few years have a lot of investors running scared. But for those who can get past the initial flinching, there are serious opportunities out there.
To flesh out these opportunities, I asked two of my fellow bank analysts for the banks they think are buys at today's prices. After they share their favorites, I'll share mine.
Matt Koppenheffer, Fool contributor
Looking ahead to 2011, I think there are a lot of opportunities in banking. I've found myself being convinced by some compelling arguments that some of the bigger banks -- particularly the beleaguered Citigroup
Instead, I think investors that want to add banks to their portfolio can look toward two groups. First, there are the quality banks. These are banks that currently have lower levels of nonperforming assets, approach their business with a conservative eye, and, in many cases, are currently paying healthy dividends. Cullen/Frost Bankers
The other group you have to hold your nose a bit to handle. These are banks that have been battered by the recession and financial crisis and are still trading at failure-is-around-the-corner multiples, but that seem to have the wherewithal to pull themselves through. Marshall & Ilsley
Alex Dumortier, CFA, Fool contributor
"To the extent we have been successful, it is because we have concentrated on identifying one‐foot hurdles that we could step over rather than because we acquired any ability to clear seven‐footers." --Warren Buffett, on the success he and Charlie Munger have achieved at Berkshire Hathaway.
In the banking sector, there is a one-foot hurdle available for the stepping, but it's not a single stock. On Nov. 24, I suggested investors consider buying a basket of the shares of the nation's four largest commercial banks, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo
Since then, Goldman Sachs turned positive on financial stocks for the first time since 2008. From the date on which the idea was published through Tuesday, the basket is up 9.5% against just 3.6% for the S&P 500. I expect that outperformance to continue, with dividend increases in 2011 acting a catalyst; in my opinion, at least three of the four banks will receive authorities' authorization to raise their dividends next year, perhaps as early as the first half. The basket remains very cheap today on the basis of book value and earnings multiples – there is still time for investors to participate in this trade.
Anand Chokkavelu, CFA, Fool contributor
The banks I've been stalking recently have either been really big and scary or really small and solid.
Like Matt and Alex, I see opportunity in the big banks. But these are only for those who are comfortable with the risk that something terrible and ugly appears from their inscrutable balance sheets. I am, so I recently bought shares of Bank of America. That's my favorite big, scary bank at today's prices.
On the other side are small banks that stick to servicing Main Street (rather than playing Wall Street games). Many of them pay tasty dividends and never took much of a hit during the financial crisis. A quality one to look into is Bank of Hawaii
Bank of America may be able to start paying a real dividend again soon, and Bank of Hawaii already pays a 3.8% dividend yield. For even higher dividend yields, click here to check out our free report "13 High-Yielding Stocks to Buy Today."