3 Top Bank Stocks to Add to Your Portfolio

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The S&P 500 may be trading near its all-time high, but that doesn't mean that every sector of the market is expensive. In fact, the persistently low-interest-rate environment continues to keep the valuations of the banking sector in check, causing many financial stocks to trade for mouthwatering prices.

Knowing that, we asked a team of Fools to pitch their top banking stocks that can be safely purchased today. The banks they picked: Wells Fargo (NYSE: WFC), Goldman Sachs (NYSE: GS), and Bank of America (NYSE: BAC).

Headline worries = buying opportunity

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    Brian Feroldi

    Image source: Wells Fargo

    That's why I don't think there's going to be a mass exodus of customers given the recent scandal

    As disgusted as I am with the company's behavior, the investor in me has a hard time seeing how this permanently impairs the bank's future profitability. After all, the average Wells Fargo retail customer actively uses more than six different products, making it incredibly difficult for someone to up and leave. In addition, Wells Fargo produced a net income of $5.7 billion in the last quarter alone, so the $185 million fine will have almost no impact on this company's financial statements.

    However, the negative publicity has put the company's shares under a little bit of selling pressure, which could make right now a great time to buy. The company's trailing and forward P/E ratiosprice-to-book

    All in all, I have high confidence that Wells Fargo will sail through this rough patch with almost no damage done to its core franchise. Buying shares while the market is down on the company could prove to be a profit-friendly move.

    The best and brightest of Wall Street

    Matt Frankel

    • It's cheap: Although it's not quite the bargain that it was earlier this year, Goldman still trades for less than its book value.
    • Industry leader: Goldman ranked first in worldwide announced and completed mergers and acquisitions through the first half of 2016, and the bank attracts the best talent in the business.
    • Complementary businesses: Because of the diverse nature of its business, Goldman Sachs can make money in a variety of economic climates, as many of its business divisions do well when others do poorly. For example, when interest rates rise, debt-underwriting revenue can drop, but fixed-income trading revenue will likely rise.
    • Smart management: Goldman's management is buying back shares aggressively to take advantage of the stock's cheap valuation. By repurchasing shares for less than their intrinsic value, the bank is creating instantaneous value for shareholders.

    I could go on, but in a nutshell, Goldman Sachs is a well-diversified company run by the smartest guys on Wall Street. In fact, Goldman shareholder Warren Buffett referred to his investment in the bank as a "bet on brains," and I agree. While it's still trading at a bit of a discount, Goldman Sachs is definitely one bank stock to think about adding to your portfolio in September.

    Cheap and cheerful

    Eric Volkman

    Because a bank's assets are of crucial importance, its price-to-book-value ratio is arguably its top valuation metric. All things being equal, a decent-performing bank with a price/book under 1 is generally considered a buy, while a stock approaching or exceeding 2 is a sell.

    At the moment, Bank of America shares trade at a measly 0.66.

    That's unreasonably low, particularly considering that the company has been performing well of late. Its second quarter beat analyst estimates with a healthy $4.2 billion net profit, a total that was helped by an encouraging 14% year-over-year rise in global trading revenue. Deposits and loans also saw improvement.

    Meanwhile, the company's legacy bad assets from the financial crisis era are melting away, and its days of heavy legal payouts are largely in the rearview mirror. The bank is also doing a good job reining in costs. On top of that, it has enough room for a 50% hike in its dividend, which it declared this past July.

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    Brian FeroldiLike this article? Follow him onTwitter where he goes by the handle@Longtermmindsetor connect with him on LinkedIn to see more articles like this.

    Eric VolkmanMatthew Frankel

    The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short October 2016 $50 calls on Wells Fargo. The Motley Fool recommends Bank of America.

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