5 turnarounds to bank on

These leading financial companies are suitable for long-term, value-oriented investors.

By TheStockAdvisors Apr 30, 2013 9:31AM

Arrow Up © Nicholas Monu iStock Exclusive Getty ImagesBy George Putnam, The Turnaround Letter

Banks seem to be the companies that everyone loves to hate these days. Many are still bashing the banks for helping cause the financial meltdown in 2008.

For investors who have been brave (or contrarian) enough to venture into bank stocks, they have been quite rewarding. But we believe that the bank stocks have a lot further to run. It probably won't happen overnight, but if you are willing to buy some bank stocks and hold them for several years, you should be handsomely rewarded.

There are a number of reasons why we like banks right now. First, they are cheap by historical measures. A number of banks today are still trading below book value; just a few years ago, many traded at two or three times book value.

Second, loan growth (which, as long as the loans are made prudently, leads to profit growth) is likely to accelerate as the economy continues to improve and lending polices become a little more liberal. (After 2008, many banks became ultra-conservative; in other words, closed the barn door after the cow was already out.)

Another reason we like the banks is that they are generally faring well on the government's "stress tests" (which are probably another example of closing the barn door too late, but that's another story).

This means that the banks are less risky than in the past. Moreover, after a bank passes its stress test, the government is likely to allow it to raise dividends and initiate stock buybacks -- both of which should boost the stock price.

Finally, we think banks will benefit when interest rates eventually begin to rise. With rates held low by the Federal Reserve, lending margins have been compressed, which holds down profitability.

As rates rise, margins should expand, leading to more profits. The banks discussed below are a mix of money center banks and regional banks that have strong business franchises and that we think could be particularly rewarding for investors.

Bank of America (BAC)

Bank of America was both a victim and beneficiary of the financial crisis. While it took big hits from an operating perspective, it was able to greatly expand its reach by buying Countrywide Financial and Merrill Lynch.

Management has done a good job of realigning the asset base and bolstering the balance sheet. The Fed just approved its plan to buy back $5 billion of stock and $5.5 billion worth of preferred shares.

Bank of America is benefiting from the revival in the housing market, and it has made significant headway in resolving mortgage-related litigation.

Citigroup (C)

Citigroup was in the infamous position of being the largest recipient of federal bailout money during the financial crisis. But it has come a long way, disposing of non-core businesses and shoring up its capital base.

Following the latest stress test, Citi obtained Fed approval to repurchase up to $1.2 billion in stock and maintain the dividend.

A new CEO took over last October, and management should soon be able to move beyond balance sheet repair to return to focusing on the company's substantial international growth opportunities.

JPMorgan Chase & Co. (JPM)

JPMorgan Chase has had more than its share of negative headlines recently. But despite its botched "whale trade" that led to a more than $6 billion trading loss, the company was still able to report a $21.3 billion profit for 2012.

Notwithstanding the negative press, JPMorgan remains a global powerhouse. Although the company still has some issues to resolve with the Fed, we expect the company to get approval to increase the dividend and repurchase roughly $6 billion in stock over the course of the next twelve months.

US Bancorp (USB)

US Bancorp was among the first of the nation's banks to repay its federal bailout funds. Management gets high marks for maintaining strong financials, which have allowed the company to make acquisitions during a time when many banks are still selling assets.

And it just received approval to increase the dividend by 18% and institute a new $2.25 billion stock repurchase program. It is also among a small group of banks that are not only expected to survive under the worst-case, stress-test scenario but to actually remain profitable.

Wells Fargo & Co. (WFC)

The product lines at Wells Fargo covers nearly every imaginable aspect of consumer, commercial and investment banking services. As one of the largest originators of mortgages, Wells should benefit from the rebound in the housing market.

Management has also made a commitment to managing costs. Wells recently received permission from the Fed to raise its dividend and increase its share buyback program.

More from TheStockAdvisors.com

Apr 30, 2013 1:06PM

I tend to agree with Mr Fat Cat 

I have three of those and am looking the other 2

Apr 30, 2013 12:14PM

Fats........Why would you have all of these stocks.....That's a lot in JUST ONE Sector..?

One or two good ones usually suffice.?


Oh that's right I forgot, you've got Millions in other Sectors too....Just like Warren and George.

We are spread across about 10 Sectors with Diversity...

But we only have a few thousand to risk....


Apr 30, 2013 10:57AM

Why not just buy a banking ETF?


How do you know Lizzie Warren isn't going to take an axe and give these bankers 40 whacks?  (into much smaller, ripe for failure size companies)

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