I was at a venture capital summit in January where a banking analysts suggested that historically banks are a screaming buy when they can be purchased for less than book value. I tend to agree with that assessment, however, when the book value is constantly being reduced due to significant write-downs as a result of the subprime mess, that theory gets a little muddy.
Now that I have convinced you that banks are not worth looking at due to unknowns, let me confuse you even more by stating that I am starting to think the major risks are out there and the upside is getting better every day. Are we still in a slumping housing market that continues to leave unexposed risk the the investor? Yes. Are we staring a possible recession in the face that could cause things to worsen even more? Yes. Is the sky falling? No.
One thing that most investors would agree on is that banks are in the money business. They are some of the leading experts on how to turn a profit. When the opportunity exists to purchase leading banking instutions at nearly 50% discounts, while raking in 6%-8% dividend yields, smart money gets in and expects to go on a bumpy ride.
My top TWO: Bank of America (NYSE: BAC) and Wachovia (NYSE: WB).
BAC is strategically positioned to do better than their peers once the current cycle of real estate debacle and "flipper depression" is over. They are buying Countrywide on the cheap and in a few years BAC shareholders will reap the benefits. Getting paid 6.2% to ride the storm is not a bad way to spend a couple of years. The stock WILL be higher in the next 24-36 months.
WB is one of my favorite bank stocks. They are well managed, they did a fair job in keeping the Wachovia culture by dropping the First Union baggage to a large degree. Perhaps most intriguing, they currently pay an 8% dividend, so I get paid well while I wait.
There might be more negatives to come in this sector, but neither of these banks is going to go out of business and both should be stronger than their peers when the storm passes.
DISCLAIMER: I have no relationships with either of these banks in any capacity except as a customer and shareholder.
