After a very strong start to 2012, bank stocks have faded over the past few months as concerns over Europe and the credit market have once again taken center stage. JPMorgan Chase's (JPM) trading debacle has also likely put the focus on increased regulation on proprietary-trading businesses within the major money-center financial institutions.
As I see it, the pullback in this space is an opportunity to pick up financial shares on the cheap. Ideally, I would like to invest in banks that have these four qualities little exposure to Europe; will not be affected by the inevitable tighter rules on trading; not dependent on the housing market recovering; and sporting reasonable valuations, solid balance sheets, low volatility and decent dividend yields.
Here are two selections that meet these criteria.
The Bank of New York Mellon's (BK) global products and services includes custody services, wealth planning and private banking to high net-worth individuals. Here are four reasons BNY provides solid value at $20 a share.
● The stock is selling at just 8.3x forward earnings, a significant discount to its five-year average of 12.1x.
● BNY yields 2.5%. However, its payout ratio is only approximately 25% of earnings, and its dividend payout that was 45% higher pre-crisis. I'm looking for the firm to raise its dividend at least in line with projected earnings per share over the next few years -- that is, at least 10% a year.
● The stock is cheap at 73% of book value, and it has a projected five-year price-to-earnings-to-growth ratio of under 1 (0.80).
● The company has an AA-rated balance sheet, a low beta of 0.86 and the median analysts' share-price target is $26.
Northern Trust (NTRS) provides trust services, asset management and fiduciary and banking solutions for corporations, institutions, families, and individuals worldwide. Here are four reasons why this name is also a solid pick at its current price -- around $43 a share.
● The company has a solid balance sheet that's A+ rated by Standard & Poor's, a low beta of 0.89 and a yield of 2.8%.
● Northern Trust is one of the few large financial institutions experiencing consistent and stable revenue growth due to the nature of its products and clients. Analysts expect 6% annual sales growth both for 2012 and for 2013.
● Consensus earnings estimates for both 2012 and 2013 have increased over the past three months, and the stock sells for under 13x forward earnings -- a discount to its five-year average of 16.2x.
● The median analysts' price target is $49.50 for the 20 analysts who cover Northern Trust.