2 Banking Stocks to Buy on Weakness

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Thursday Morgan Stanley (NYSE: MS) saw massive post-earning losses despite beating on both the top and bottom line. This only continued a trend that we’ve seen over the last weeks with large banks such as Bank of America (NYSE: BAC) and Goldman Sachs posting large loss after strong quarters. However, this industry is not producing “bad” earnings, and any weakness should be viewed as an opportunity.

Morgan Stanley

For the week, Morgan Stanley closed with losses of almost 6% due to both its own earnings and the earnings of others within the space. The weakness in shares was created as investors/analysts focused on the company’s weakness in its wealth management industry. So far its financial advisory fees were among the worst of the major banking players. This is viewed as a major negative seeing as how this one segment produces margins of 17%.

While Morgan Stanley did lose 5% of its value post-earnings, it is important to note that the company did beat expectations, despite low financial advisory fees. This should speak volumes for the rest of the company’s business, as global wealth management produced solid gains for the company. Now, the stock is trading at a 35% discount to its book value per share, and with its decision to focus on growing revenue from bonds, commodities, and currencies, you have to be optimistic in the company’s future.

Bank of America

Shares of Bank of America fell by almost 6% as the company’s bottom line was just shy of expectations. This slight miss was reported on a day when the markets were selling off due to concerns regarding German debt. The company did see weakness in mortgage banking and investment banking also saw some weakness. However, as I look through the quarter, I really can’t find any glaring negatives.

To me, the company’s lending stood out, as the company saw a 3.4% rise while others in the sector saw declines. Then, there is Merrill Lynch, which contributed 83% of the wealth unit’s revenue. This one unit alone saw its best results since the 2009 Merrill merger. I found this very encouraging, as Merrill generated $3.7 billion, a 6.9% gain over the previous year. Much of Bank of America’s upside is tied to Merrill, and it now looks as though the two are finally working in tandem.

With all things considered, I see no reason for why BofA would have seen such sharp declines, and I now think it’s the time to buy. The stock is trading at a 45% discount to its book value per share, which basically means priced for destruction. With such favorable metrics and fundamental progress, I really don’t see a great deal of risk. There are many worried about a potential market pullback, although I do think the company’s $10.5 billion buyback program should create a little less volatility; which also shouldn’t be discounted.

Conclusion

In my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I discuss in detail the process of using weakness after strong fundamental quarters to capitalize on value. Both BofA and Morgan Stanley are clear examples, because although we can find some weaknesses in the quarters, these are two stocks priced so cheap that weakness should be priced appropriately. Overall, I see more good than bad, and a number of catalysts that should return large gains over the next several months. 


Brian Nichols is long BAC. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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