Can These Stocks Bounce Back?

However hard the market slams a stock, there's always the chance it'll come bouncing right back. We'll consult our Motley Fool CAPS community to find shares on the rebound, examining one specific sector of the economy in search of companies with rising CAPS ratings.               

There are 244 stocks listed under "banking" in the CAPS' screener, of which less than 17% carry well-respected four- and five-star ratings. Those accolades mean our 180,000 CAPS members are confident that these stocks will beat the market in the months ahead, but let's see what members are saying about the following:

Source: Motley Fool CAPS.

International and financial worries are again gripping the market, but with the S&P 500 down almost 3% over the past 12 months, it's probably not surprising to learn the CAPS banking stocks have done much worse, falling more than 15% in that same time span. So let's take a closer look at why investors think some of these other companies won't be jumping from the frying pan into the fire now that the markets are roiled again.

Death of the euro
I'm not sure where the faith in National Bank of Greece comes from. Even after Greece's prime minister, George Papandreou, resigned following his near-disastrous call for a nationwide vote on the EU's bailout of his country, there seems little hope the country has the fortitude to do what's right to save itself.

Worse, it's not alone. When even the pillars of the European community like Germany and France are questioned about their stability, lesser able countries seem to have little chance. Already, plans are being readied for the collapse and breakup of the euro, with the possibility that riots and chaos will result.

Most of the financial institutions with the greatest exposure to Greek sovereign debt are in Greece itself, British diplomats are readying for the possibility of civil unrest, meaning even Lloyds Banking Group (NYSE: LYG) or HSBC (NYSE: HBC) won't be much of a safe haven. The drain of drunken government spending has finally reached its breaking point.

CAPS member rett448 says National Bank of Greece will either bounce back or we'll be facing a financial Armageddon anyway.

Purely speculative bid. Has the potential to be a 4 or 5 bagger. If Greece defaults this is toast, but at the point we may have much bigger problems.

That hardly seems to offer cold comfort to investors in U.S. banks. If Europe fails, investors would be well advised to look for the strongest financial institutions on this side of the ocean if (or when) the next financial meltdown occurs.

Look across the pond
Investors might want to take a closer look then at US Bancorp, which just came off a record quarter in which profits grew 40% to $1.3 billion on a 5% revenue increase. It also avoided the PR miscue of Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC), which initiated fees for debit card usage and then beat a hasty retreat in the resulting uproar. As a very profitable financially healthy institution, US Bancorp didn't have to rush in to making a decision to soak its customers (though it was really the Frank-Dodd banking-reform bill that caused it).

That could partly explain why, with more than 2,000 CAPS members weighing in on the bank, more than 93% see it outperforming the broad market averages.

If that was all banks had to worry about, they would probably come out relatively unscathed. But unfortunately, the Federal Reserve is also working at cross-purposes to their salvation, though it's probably hurting the smaller banks while helping the largest, politically connected ones. Operation Twist continues to keep interest rates artificially low, eating into interest income earned by banks and causing them to see interest-earning assets reprice to lower levels.

The low-interest rate environment caused Hudson City Savings Bank to suffer a 16% decrease in net interest income and a 91% drop in non-interest income. And with Fannie Mae and Freddie Mac coming to dominate the mortgage market, they've choked out private-sector mortgage investments. The government is essentially the mortgage market now.

Yet Hudson City was able to cut its provision for loan losses in half in the quarter, meaning it's looking much healthier now. Highly rated CAPS All-Star limanova finds lots to commend the bank's management team on, though it's fighting an uphill battle against government intrusion in the marketplace: "Good managment, good dividend, and not crippled from [gluttonous] dealing in subprime. Too bad the big banks took so much cord they could hang themselves, then got rescued by the Gov't to hang itself & us all, in their place!"

Add US Bancorp and Hudson City Bancorp to your watchlist to see whether either of them can continue growing with a European disaster looming and government policy at odds with their survival.

The ball's in your court
There are many factors that go into whether a stock is a buy or sell, so it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page. Head over to CAPS today and share your thoughts with other investor analysts on whether you think these stocks are ready to bound higher.