Market corrections aren't the times that try men's souls, they're the times that savvy investors get rich. And there are few better ways to exploit a market correction, like the one we're experiencing, than to buy shares of solid but beaten down bank stocks that trade for discounts to book value.
By my count, there are five bank stocks that have fallen by more than 13% over the past month. Bank of America led the way, with a 14.9% decline since July 22nd. Citigroup is next, with a 14.4% drop. Regions Financial takes third place, off by 14.3%. And Keycorpand BB&Tround out the five worst-performing big bank stocks since July 22, down by 13.9% and 13.1%, respectively.
If you couple these performances with valuation, it's my opinion that many of the banks in this table offer attractive investment opportunities. I'm referring specifically to Bank of America, Citigroup, and Regions Financial, all of which trade for substantial discounts to their book values.
In Bank of America's case, its shares trade for nearly 30% less than the bank's own estimate of its net worth. Citigroup and Regions Financial sell for slightly smaller discounts, but they're still bargains when you consider that many investors believe the key to successful bank stock investing is buying banks when their shares trade for discounts to book value and then selling them after they recover -- check out the following slideshow for a list of the metrics used by analysts to analyze and value bank stocks.
I'm not a particular fan of the second step in this strategy -- the selling part -- because the biggest returns from bank stocks are generated by the combination of time and the law of compound growth. However, it's hard to argue with the first step -- i.e., buying bank stocks when they're cheap.
Take Warren Buffett, the best bank investor in the world right now, as an example. When the 84-year-old billionaire first purchased shares ofWells Fargoin the early 1990s, many believed that the California-based bank, as well as the bank industry at large, was on the verge of failure. Here's the concluding paragraphs from a 1990New York Timesarticleon Buffett's purchase (emphasis added):
Meanwhile, here's how Buffett explained the decision in that year's letter to the shareholders of Berkshire Hathaway :
Fast forward to today, and Berkshire's 9.4% interest in Wells Fargo is worth more than $25 billion.
Buffett did the same thing in the latest crisis, investing $5 billion each into Bank of America and Goldman Sachs at the bleakest points in the banks' recoveries. While the Oracle of Omaha has since cashed out a large share of his investment in Goldman Sachs for a multibillion-dollar profit, his stake in Bank of America is currently valued at roughly $12 billion.
The point here is that this is when you buy bank stocks, not when you sell them.
The article 3 Cheap Bank Stocks that Have Dropped More than 13% Over the Past Month originally appeared on Fool.com.
John Maxfield has no position in any stocks mentioned. The Motley Fool owns and recommends Wells Fargo. The Motley Fool recommends Bank of America. 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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