This article is part of our Rising Star Portfolios series.
The banking industry is complex, but my philosophy is to keep it as simple as possible. I monitor a group of more than 500 public banks, looking regularly for the ones on sale.
You can't know exactly what's on a bank's balance sheet, but you can get a good idea from past performance and bank-specific metrics. The way I like to cover myself for the uncertainty is to diversify.
There are periods when values are hard to come by, but the market's volatility has me seeing quite a few banks that meet my standards. I want to share a basket of them today, which I'll be buying tomorrow in my real-money portfolio.
Here they are, along with their market caps, price-to-tangible book values, and price-to-earnings ratios.
P/Tangible Book Value
Fifth Third Bancorp
Source: Capital IQ, a division of Standard & Poor's.
When you look at this list, all are selling for reasonable-to-low price-to-tangible book values and P/E ratios. Each is also provisioning a reasonable amount for bad loans.
But otherwise, they're quite different. Looking at the extreme, JPMorgan is more than 400 times larger than Republic (on a market cap basis) and engages in a scale of derivatives and trading operations only Citi could dream of.
While JPMorgan and Citi are among the murkiest of the murky in terms of transparency, they're also among the first railcars in the too-big-to-fail train. Their size also offers them the clout to successfully lobby for what I call "prebailouts" ... regulations that favor (or at least fail to much hinder) larger banks.
Back to similarities, each of the banks above, except Republic, took TARP funds, but each has also paid them back with interest. And each, except Citigroup, pays a nontrivial dividend yield (led by Republic's 3.5%).
The bottom line
In the real-money portfolio I manage for The Motley Fool, you'll see a variety of companies, but my primary focus is building a portfolio of banks that are bought on the cheap. The better the quality of the banks, the more I'm willing to pay.
At the extreme, for example, my portfolio holds shares of Bank of America
Instead, tomorrow I'll reload on prior picks JPMorgan and Republic Bancorp and buy initial shares in the four others. To see my entire portfolio, click here.
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Anand Chokkavelu personally owns shares of JPMorgan, Citigroup, and Republic Bancorp. The Motley Fool owns shares of Republic Bancorp and JPMorgan Chase. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.