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The stock market started off on the wrong foot in 2015, with declines in January hitting the financial sector especially hard. The Financial Sector SPDR lost more than 6% in January, and some worry that losses could continue throughout the year. Yet as February approaches, some potential opportunities in the banking sector now look attractive to those hunting for bargains. Let's take a look at three stocks that could offer investors some profit-producing potential in the coming month.
Quality on sale
Among large banks, investors have learned that you get what you pay for. Banks that have cheap valuations using common metrics like price to tangible book value tend to have weaker track records in managing financial risk. By contrast, those banks that have done a better job of handling risk even during tough periods trade at fairly lofty levels.
Source: Wikimedia Commons.
However, January's declines have given you a chance to pick up higher-quality banks a bit more cheaply. U.S. Bancorp , for instance, dropped more than 6% in January, bringing its price-to-book ratio below 2. That's not cheap by any stretch, but U.S. Bancorp reported record results in its fourth-quarter financial report a couple of weeks ago, including net income of $5.85 billion on continued increases in net interest income and reduced charge-offs on bad loans. Moreover, U.S. Bancorp's performance metrics stand up well against its large competitors, with returns on average common equity of 14.7% and returns on assets of 1.54% for the full 2014 year. You might not earn long-term returns that are as impressive as those U.S. Bancorp has produced over the last five years, but picking up even a small bargain could help your portfolio.
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Looking for energy-price fallout
Many banks have close ties to the energy sector, and the plunge in oil prices has raised concerns among those banks that the loans they've made to energy companies could turn out badly if those borrowers suffer huge declines in revenue as a result of oil's crash. San Antonio-based Cullen/Frost Bankers isn't a household name among most Wall Street investors, but the financial institution has plenty of ties to the oil and gas production industry thanks to its convenient location in the middle of Texas oil country. Shares of the regional bank have fallen more than 20% since November as people worry not only that commercial loans to energy companies could go bad, but also that the entire Texas economy is teetering on the brink of a recession if oil's bust continues.
Yet bank officials aren't worried. In an interview with the San Antonio Express, Cullen/Frost CEO Dick Evans cited the Federal Reserve Bank of Dallas' assessment that oil's decline would actually have a neutral economic impact on the state. Texas' economy has diversified greatly since the oil boom of the 1970s, and Evans believes oil's drop could actually be good for the local economy by heading off irrational deals in the energy sector. As energy prices start to approach bottom and investors realize the bank's operations aren't in danger, Cullen/Frost could easily bounce back as conditions turn more favorable throughout the banking sector.
Going the investment-bank route
If retail banking isn't your thing, then focusing on high-quality investment banks could give you the exposure you want. In this realm, Goldman Sachs has distinguished itself this earnings season, yet it has also suffered some of the worst declines in January, falling 10% for the month.
Source: Goldman Sachs.
Goldman managed to do better in its fourth-quarter results than most shareholders had expected, with revenue and earnings beating analysts' consensus figures. Yet most investors focused instead on the plunges in many of Goldman's key segments. Investment-banking revenue fell 16% during the quarter, with equity underwriting revenue plunging 45% and a 29% drop in trading revenue from the fixed-income, currency, and commodity business.
Still, Goldman is making steady improvement in key long-term areas. Tier 1 capital ratios rose to 12.2%, and extensive share repurchases helped drive book values up, leaving the stock trading at a price-to-book ratio of just 1.06. As markets start to get more volatile, Goldman will have an opportunity to demonstrate its trading prowess once again, and if it's successful, today's share price could look like a true bargain in hindsight.
These three bank stocks aren't the only ones that could benefit from a rebound in the financial sector. But their unique characteristics arguably give them a greater chance of giving investors solid returns both in February and well into the future.
The article 3 Bank Stocks to Buy in February originally appeared on Fool.com.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. 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.
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