3 Banks: 2 to Buy, 1 to Consider

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

It is always nice getting updated on the current happening of bank stocks. With just a few looks at the grand strategy for the company you can look at the numbers as they come down the information pipes. In the gleaming internet age all the numbers are crunched for us and metrics are delivered in nice packages. The four big banks have all reported earnings and had their conference calls. My favorites have not changed much, but I am willing to consider a new one in light of recent events.

1. Wells Fargo Helps Form the Base of the Risk Pyramid

Low risk does not mean no risk. With that said, Wells Fargo (NYSE: WFC) is something I consider low risk. Divorcing risk from the fundamentals for a moment, Wells Fargo has a lower risk path than other banks. It is a classic bank to the extent it is possible in these heady days. It loans out money and makes a profit on the difference between the interest it collects on loans and the interest paid to depositors. Wells Fargo does have a growing investment banking arm, and this is likely to increase volatility of revenues somewhat. Wells Fargo avoided a lot of the most dangerous practices of the other banks prior to the financial meltdown, and that gives it some extra points as a safe investment.

Wells Fargo is not for the impatient. The company is priced a bit higher compared to its book than it peers. However, for profitable companies I do not find the price-to-book value as meaningful. Wells Fargo has a 1.26 price-to-book ratio, while the other banks are below 1. It is the return on the book that matters. An inflated acquisition that still occupied an expensive line on the balance sheet, while only costing the company money will inflate the book and weigh down returns. The company has strong and consistent revenue growth and earnings growth that has been consistent sequentially for over a year, though revenue growth has only been consistently positive for about 1 year. Even when revenue declined earnings increased, which is a strong sign.

I know the company has been wanting to boost dividends and do some buybacks. It is currently doing a stock buyback, and I expected dividends to grow in the future. The company is a Buffett favorite, which means that it receives a lot of positive attention. It deserves the attention, but that means that the near-term outlook is flat to moderate decline should earnings results flatten out instead of growing impressively. Wells Fargo is a long-term buy and hold. You can wait for a decline or go with puts at $34 or $33, or just avoid all that and buy it with a 3-5 year outlook.

2. Bank of America has More to Give

I liked Bank of America (NYSE: BAC) last year when it struggled to hold $9. Back then I preferred putting less than $100 into buying a bunch of call options on the off chance the stock just took off. Now that the company has crossed that extremely difficult $9-$10 range, a straight buy seems more plausible. My fear was that it would hit $10 fail to hold it and drop down below $8 as people got frustrated with the lack of movement.

A share price of around $15 seems plausible for the next year. That might be a conservative outlook, but even conservatively that is not a terrible return since it is over 30% from the current levels. The earnings call had little in the way of grand strategy for the company. It is continuing on its current path of expense cutting and streamlining. The goal is to create a strong framework to produce revenues. It has a massive cash pile of over half a trillion dollars so it definitely has the breathing room to accomplish its goals.

With Bank of America you are looking for the market to believe in the turnaround. It is not for sure that you can call BAC a turnaround play, but revenue and earnings are eroding. The second thing BAC needs is a growing economy with the market confident in the economic growth. That should create fertile ground for share price growth. There is still a lot of fear regarding legal problems that weigh on the stock, and the company does incur costs associated with real legal issues. Once legal concerns clear away the stock should see a nice bump.

3. Citigroup Worth Buying on Market Negativity

My interest in Citigroup (NYSE: C) sounds completely contrarian, but I try not to espouse any specific philosophy. The recent earnings weakness led to a decline in the share price. If you look at a 5-day chart it looks dramatic, but the decline was just over $1 and the price has recovered a little in the last two days.

Legal expenses ballooned last quarter, which explains some of the weakness. It was the bottom line that was the problem, and not necessarily the top line. Revenues have been flat the last few quarters, and while that is not ideal it could be worse. Expenses need to be reigned in, but litigation expenses probably will not be $1.3B every quarter. Expense control will really be useful when revenues recover. Citigroup is worth considering only because the market has punished the stock for the earnings drop, but it might not be enough to really turn it into a buy on negative sentiment. Had it fallen to $40 or below it would make a fantastic medium-term position.

Final Thoughts

Citigroup is my least favorite, and for a bank on the mend I would go with BAC. I like Wells Fargo hands down, which is why I do not go over JPMorgan here despite it having higher returns in 2012 and so far in 2013. My fire and forget stock is Wells Fargo, and my turnaround stock is Bank of America. Citigroup is something you could trade if you think the next earnings report will beat, which should create a positive surprise considering the last earnings report.

 


TheArchivist has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , and Wells Fargo. 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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