Across the board, stocks have rallied from their 2009 lows. Corporate profits have expanded significantly, but so have market valuations. However, the financial sector remains relatively "cheaper" than other industries as many investors are still hesitant to jump back into the asset class that crumbled the most during the market downturn.
To find the best opportunities in the financial sector, we asked our top financial writers to tell us the one stock they feel comfortable enough to buy today and happily hold for the next 20 years.
Patrick Morris: It may not make me popular, but my vote would be Bank of America (NYSE:BAC). There is no denying that Bank of America has faced a rather tumultuous time both during the financial crisis and the years that followed. There is no denying it has left the American public -- and its shareholders -- with a justified sense of frustration and anger.
Yet when you take a step back, you'll see that Bank of America in 2014 is still down more than 60% from where it stood in in January 2007. By comparison, peers JPMorgan Chase and Wells Fargo are up 35% and 50%, respectively. While I understand those three banks have had mighty different outlooks emerging from the crisis, the fact that Bank of America is still well below where it once stood cannot be discounted.
Speaking of discounts, Bank of America also remains cheap, trading at a 1.25 price to tangible book value ratio, versus 1.5 for JPMorgan and dramatically lower than the 2.0 multiple held by Wells Fargo. On sheer valuation alone, it appears to be an attractive consideration.
Bank of America seems to be turning the corner, and the reality remains it is the largest bank in the U.S. by deposits in its consumer operations. It also has both massive and expanding business and investment banking services, wealth management, and others.
Considering that it provides value relative to its peers, a commanding market presence, and growth opportunities in its businesses, Bank of America is one stock that should absolutely be considered to hold onto for the next 20 years.
John Maxfield: The easy money in bank stocks is long gone. At the end of 2011, you could have blindly thrown darts at a dartboard and come up with attractive investment options in the industry. Since then, however, shares of the nation's largest lenders have soared on the back of an improving economy and lower loan losses. To name only the most prominent, Bank of America has more than tripled in value, while JPMorgan Chase and Citigroup are both up by a factor of two.
As I see it, this leaves the astute investor with only two options. First, they can avoid the sector altogether -- which, quite frankly, wouldn't be an imprudent move given the self-interested mismanagement that prevails at the top of most big banks. Or second, you could limit yourself to the institutions that have proven themselves through multiple cycles to be truly superior to their competitors.
Assuming you choose the latter course, it's my opinion that there are only four banks that should even be considered as additions to an investor's portfolio: New York Community Bancorp, M&T Bank, U.S. Bancorp, and Wells Fargo. That's it. Investing in any big bank beyond these is the figurative equivalence of picking up dimes in front of a steamroller -- that is to say, the risk of future downside is demonstrably larger than any potential return.
Of these, my favorite is U.S. Bancorp. Unlike New York Community Bancorp, which is a truly outstanding organization, it isn't on the verge of becoming a systematically important financial institution, which will likely entail a cut to the New York City-based bank's generous payout ratio. Unlike M&T Bank, it isn't in the midst of a transformative acquisition (M&T is still awaiting regulatory approval of its Hudson City Bancorp deal). And unlike Wells Fargo, U.S. Bancorp remains under the "reputational" radar, if you will, of most consumers.
Alexander MacLennan: Among the big banks, it's tough to find one as beaten-down as Citigroup. Since mid-2007, shares are down around 90% following painful dilution, and the dividend has been slashed to just one penny per quarter -- an insulting yield for income investors.
But with all of this pain comes an opportunity at a good price. Citigroup is the only one of the four major banks to trade at a discount to tangible book value. The stock is even cheap based on forward earnings barely managing to trade above ten times, and this seems especially cheap when we factor in Citigroup's global footprint and top positions in many emerging markets.
While I see Citigroup as a long-term value, I also see potential catalysts in 2014 and beyond. As Citigroup regains its strength, it can buy back more of its stock below tangible book value (if it's still trading at such a discount). I also expect Citigroup to raise its dividend in the near future, attracting a larger group of income investors not exactly enticed by the current 0.07% annual yield.
Jessica Alling: American International Group (NYSE:AIG) should be on your buy list in 2014. Not only has the company finally resolved the last piece of its divestiture puzzle with the sale of ILFC to AerCap, but the insurer is leaps and bounds from where it was in 2009.
With smart investments in China, where the developing middle class is now looking for insurance and retirement products, AIG has positioned itself well for growth opportunities abroad.
Closer to home, the company and other private mortgage insurers are going gangbusters, even as the housing market slows during the winter season. With the Federal Housing Administration taking a step back from the mortgage guarantee market, these private insurers have a chance to gobble up huge segments of new mortgages as the economy recovers and buyers continue to enter the housing market.
For value investors in particular, the megainsurer is really attractive based on its price, which is still 22% below book value.
Patrick Morris owns shares of American International Group, Bank of America, and U.S. Bancorp. John Maxfield owns shares of Bank of America. Alexander MacLennan is long January 2015 $40 and $45 Citigroup calls. The Motley Fool recommends American International Group, Bank of America, and Wells Fargo. The Motley Fool owns shares of American International Group, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days.