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3 Bank Stocks to Consider in a Market Correction

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There are some tremendous bargains in the banking sector right now, and here are three of our favorites.

The stock market has taken a nosedive lately, and the financial sector got hit pretty hard. While it can be troubling to watch the value of your portfolio go down, it is also a great time to hunt for good stocks at cheap prices. With that in mind, here are three bank stocks that our contributors think you could buy right now.

Joe Tenebruso (Wells Fargo): When it comes to bank stocks, prudent risk management and efficient operations are of paramount importance. It's no surprise then, that one of the best-performing banks over the past two decades -- Wells Fargo (WFC 1.52%) -- excels in both regards.

WFC Total Return Price Chart

Wells Fargo's efficiency ratio -- a measure of the percentage of a bank's revenue that's consumed by operating expenses -- is consistently near the top of industry rankings. This helps Wells Fargo maximize its profits, as well as its shareholders' returns.

Further helping to reduce risk are Wells Fargo's diversified business lines, which span areas such as community banking, mortgage lending, and wealth management. This diversification gives the banking titan the lucrative opportunity to cross sell its services -- thereby increasing the value of its client relationships -- while also allowing Wells Fargo to better withstand a downturn in any one area of its business.

Maybe most importantly, Wells Fargo has earned a well-regarded reputation for its conservative culture. The bank has been known to forgo profits to maintain its disciplined underwriting standards -- a strategy that has served the company well, particularly during the financial crisis of 2008-2009. And with fear and volatility once again returning to the markets as we enter 2016, risk-averse investors may wish to seek comfort in Wells Fargo stock. 

Matt Frankel (Goldman Sachs): This was one of the toughest articles I've contributed to, simply because there are so many great bargains in the banking sector right now and choosing a single stock was difficult. However, one bank I'm seriously considering at these levels is Goldman Sachs (GS 0.61%).

Goldman just reported a solid fourth quarter, beating expectations on both the top and bottom lines. One reason I love Goldman is apparent in its results -- the business is diverse, and poor performance by one segment doesn't necessarily kill Goldman's performance. In 2015, Goldman's investing and lending revenue plunged by 20% on weak investment performance and lower loan revenue. However, the investment bank and investment management divisions both posted stronger revenues in 2015, which helped to offset the weakness.

Finally, the reason I like Goldman right now is that the valuation is too good to pass up. Goldman is trading at a significant discount to its tangible book value for the first time in over three years, despite the post-crisis improvements the bank has made. Goldman loves to buy back its own shares, and with $63.2 million remaining on the current buyback program, the company can literally buy its shares back for less than their worth, creating instant value for investors. As long as Goldman remains at these price levels, it's a great time to invest in the smartest guys on Wall Street.

Jason Hall (Bank of America): Bank of America (BAC 1.09%) has, by most accounts, moved beyond the major damage done before and during the Great Recession, and just reported its best year in nearly a decade. Over the years since the housing bubble popped, the bank has spent nearly $200 billion dollars in legal fees, fines, loan charge-offs and other expenses related to the financial crisis. 

And with those costs firmly in the rearview mirror, Bank of America's profits could rebound sharply as soon as this year. This chart by fellow Fool John Maxfield shows Bank of America's annual profits -- and what its profits would have been without those legal expenses -- over the past 15 years:

Source: article by John Maxfield.

Bank of America's financial crisis-related expenses have been the key driver behind sub-par profits over the past eight years. 

Furthermore, Bank of America stock remains extremely cheap, even if earnings don't return to pre-recession levels in the next few years, with a price-to-book multiple far and away below its big-bank peers:

BAC Price to Book Value Chart

Put it all together, and Bank of America is positioned to finally have the bounce-back year investors have been waiting for. Now looks like a great time to buy Bank of America stock. 

Jason Hall owns shares of Wells Fargo. Joe Tenebruso has no position in any stocks mentioned. Matthew Frankel owns shares of Bank of America. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short March 2016 $52 puts on Wells Fargo. The Motley Fool recommends 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.

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Stocks Mentioned

The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
$353.82 (0.61%) $2.14
Bank of America Corporation Stock Quote
Bank of America Corporation
$36.30 (1.09%) $0.39
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$45.94 (1.52%) $0.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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