Perhaps no other industry is as affected by booms and busts as banking. Banks make money hand over fist when the times are good, but they seem to give it all back whenever the economy hits a speed bump. The key isn't to avoid bank stocks altogether; instead, you should only invest in the absolute best bank stocks the market has to offer. This October, consider these three choices selected by some of the Motley Fool's top analysts.
John Maxfield: If you're looking for a great bank stock to buy this month, or any month for that matter, it's hard to beat Buffalo-based M&T Bank (NYSE:MTB). Run by one of the nation's most respected bankers, CEO Robert Wilmers, M&T has been one of the best-performing bank stocks over the last three decades.
It's accomplished this by doing two things. First, it has one of the lowest efficiency ratios in the industry. Over the last decade, only 54.7% of its revenue has been consumed by operating expenses, compared to an average of 61.8% among other large banks. And second, it consistently originates good loans. Since 1994, only 1.34% of its loans have been classified as non-performing, versus a peer average of 1.57%.
The one drawback to M&T's stock is its price. At 1.5 times book value, it isn't cheap, trading for roughly twice the value of industry giants like Bank of America (NYSE:BAC) and Citigroup (NYSE:C). At the same time, you can trust M&T to serve as a prudent steward of your capital over the long run. And on top of this, when its transformative merger with Hudson City Bancorp (NASDAQ:HCBK) is eventually consummated, M&T could more than double its reach in one fell swoop.
In short, this is a great bank stock to buy and own for the long run.
Jay Jenkins: This October, bank investors should take a long bullish look at Citizens Financial Group (NYSE:CFG). Citizens Financial completed an IPO in September, raising about $3 billion as The Royal Bank of Scotland spun off this U.S. regional banking subsidiary. RBS isn't selling Citizens because it's a laggard or a problem child; RBS is selling because it desperately needs the capital to fix its own balance sheet. Their loss can be our gain.
Even with all those valid reasons to avoid the stock today, long term value investors could benefit tremendously by betting on a turnaround story.
One of the best-run banks in the world, TD Bank never had a losing year during the financial crisis, and is actually making more money per share now than it ever has. The bank has an outstanding history of profitability -- regardless of economic conditions -- that would make most other U.S. banks jealous. And analysts are expecting another 21% earnings growth over the next two years, making the forward P/E of 11.4 seem very cheap.
On a valuation basis, TD Bank trades for about 2.9 times its tangible book value -- which is rather high when compared to the big U.S. banks, but is actually very cheap relative to its own historical valuation, which reflects the outstanding quality of its assets.
Aside from valuation, I love TD as a long-term investment simply because I wholeheartedly believe in its business model. Ever since acquiring New Jersey-based Commerce Bancorp in 2008, TD has built a reputation as "America's Most Convenient Bank." Most TD branches are open seven days a week, and some even have drive-through banking available until midnight, making the bank very appealing to those who find "banker's hours" to be inconvenient.
Jay Jenkins has no position in any stocks mentioned. John Maxfield has no position in any stocks mentioned. Matthew Frankel owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Citigroup. 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.