When thinking about bank stocks to buy right now, or anytime for that matter, it's important to define what your objective is.
If your objective is to pick a quick win -- to hold the stock for a couple years or less -- then I'd say your best bets areBank of America and/orCitigroup . Both still trade for sizable discounts to book value even though their earnings seem to have emerged from their respective financial crisis-induced catastrophes.
I could be wrong about this, but I have a hard time imaging a scenario under which Bank of America and Citigroup don't attain respectable profitability ratios over the next two years -- a return on equity above 10%, at the very least. These banks have already absorbed the lion's share of their credit losses, and for all intents and purposes both appear to have similarly retired much of their onerous legal expenses stemming from the origination, securitization, and sale of subprime mortgages during the salad days of the housing bubble.
This clears the way for higher valuations and thus improved stock prices, it seems to me. In Bank of America's case, it isn't unreasonable to conclude that the nation's second biggest bank by assets will trade for 1.5 times book value by the end of next year. And the same can be said for Citigroup. In both instances, that would equate to a nearly 100% return on investment after future dividends are factored into the equation.
Alternatively, if you're objective is to find a long-term investment with a reasonable chance of outperforming the financial industry as well as the broader market for years if not decades, then I'd encourage you to look at US Bancorp . With $410 billion in assets, it's the biggest and arguably the best-run regional bank in the country.
It has the added benefit as well, which Bank of America and Citigroup don't, of offering potentially explosive growth. Unlike the latter two, as well as their too-big-to-fail peers JPMorgan Chase and Wells Fargo, US Bancorp's market share of domestic deposits is well below the 10% limit of total domestic deposits imposed by the Riegle-Neal Act of 1994. This means the Minneapolis-based lender is still free to pursue a strategy of growth by acquisition, which is the fastest way for a bank to expand its balance sheet.
The net result is that US Bancorp, as well as other well-heeled regional lenders, has two complementary tools at its disposal which can be used to maximize shareholder returns. It can grow market share by acquiring other depository institutions. And it can then inoculate acquisition targets with its nearly unparalleled cultural of lean and prudent banking. Its stock is expensive, to be sure, trading at two times book value, but you get what you pay for when it comes to bank stocks.
The article What Big Bank Stock Should You Buy Right Now? originally appeared on Fool.com.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Wells Fargo. 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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