Bank Stocks Are Still Bargains

 | Aug 25, 2011 | 12:30 PM EDT
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Someone asked me yesterday when I was going to quit talking about bank stocks, both here on RealMoney and in the real world. Friends are talking about Ravens-Redskins tonight, and I am talking about the comparative attractiveness of Hudson City Bancorp (HCBK) and Fifth Third Bancorp (FITB) at current price levels.

My answer is simple: I am probably not going to stop talking about banks anytime soon. Banks stocks have gotten absolutely waxed in the past month, and I think it is time to start scaling into some of these names. Of course, the Sage of Omaha stepped up the game today by buying $5 billion of Bank of America (BAC) preferred stock and warrants, and that could start some of these stocks moving higher.

This morning, I decided to check my bank stock conclusions with an additional research resource. I have been running screens and checking filings to uncover ideas. Today I went to the Standard & Poor's research site and checked its rating on banks. I ran a simple screen of bank and thrift stocks that have either four or five stars (the two highest for performance) that trade below book value.

I was pleasantly surprised to find that some of my recent picks made the screen. The research service has high rankings on Hudson City, Royal Bank of Scotland (RBS) Fifth Third Bancorp and KeyCorp (KEY). I have suggested all of these as buy candidates recently, and I either own or am short puts on all of them. I make my own decisions on buying and selling stocks, but it is always nice to have my opinion affirmed by a reliable and successful research service.

Some other highly ranked banks trade at a decent discount to tangible book value. Comerica (CMA) currently trades at just 70% of tangible book value and garners four stars from S&P. Like many other banks, Comerica is seeing sharp earnings improvements as credit losses begin to wane. It just closed on the acquisition of Sterling Bancshares, a deal which increases its presence in the healthy Texas banking market. Nonperforming assets are under 3%, and at the end of the June quarter they were 2.66% of total loans. The tangible-equity-to-assets ratio is a hair over 10, so Comerica has excess capital. S&P has a price target of $44, which would be a nice pop from today's price of $24.60.

Comerica also said recently that it intends to resume buying back shares in the third quarter of the year. With the stock below tangible book value, this is a smart move by management that should help put a floor under the stock price. I believe you can start accumulating this stock at this level. Of course, I might wait for a day, since Warren has pumped up prices. I prefer to buy on down days.

One of the more interesting highly rated cheap bank stocks on the S&P list is Zions Bancorporation (ZION). The bank is awarded four stars, and the stock sells at just 50% of tangible book value. The bank struggled during the credit crisis but took smart, aggressive risks during that period, Zions purchased three banks that were either failing or failed, and added almost $4 billion in assets. More importantly, all of these acquisitions come with loss-sharing arrangements, with the FDIC taking responsibility for most of the loan losses resulting from the deals.

The stock is at about $16.50 today, and S&P has a price target of $27 -- a very nice 12-month return if this turn out to be correct. I don't set targets as such, but if the acquired assets perform well and real estate markets do not collapse again, there is a lot of upside in this stock.

In spite of today's Buffett boom in banks, there should be more opportunities to accumulate cheap banks stocks over the next few months. The sector is cheap, and as long as the world is not ending, the upside is tremendous.

In closing, I feel like I have to say goodbye to No. 46. Rest in peace, Mike Flanagan, and thanks for the memories.

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