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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
Brian Feroldi: Most consumers stay loyal to their banks for years on end, and it's not hard to understand why. Banks have done a great job at rolling out automated services that make it easy to handle mundane financial transactions, intertwining themselves deeply into their customers' financial lives. Once services like direct deposit or automatic bill pay are in place, most consumers consider it a huge hassle to switch banks and risk a financial disruption, so they simply stay put.
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 at Wells Fargo. The bank just admitted to fraudulently opening as many as two million checking and credit card accounts without its customers' consent. Not only will the bank have to pay $185 million in fines, but its reputation as one of the better big banks has also been called into question.
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 ratios are both below 12, and the current price-to-book ratio is only 1.30. If that's not attractive enough, there's also the company's 3.1% dividend yield to consider, which is about 50% higher than the S&P 500.
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: One bank stock that I added to my portfolio earlier in 2016 is Goldman Sachs. There are a few reasons I finally decided to pull the trigger after years of watching the stock:
- 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: The big four U.S. banks get little love from investors these days. Of the quartet, I like Bank of America stock very much just now, for a simple reason -- it's unsustainably cheap.
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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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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