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June 9, 2011, 12:01 a.m. EDT
By Jeff Reeves
ROCKVILLE, Md. "” Here's why you should buy bank stocks: In the words of Warren Buffett, "Be fearful when others are greedy and greedy when others are fearful." Easier said than done, right?
Criticism of bank stocks is easy to come by. Financials are tied at the hip to the mortgage market "” so as long as housing suffers, so will they. There are debt woes, too, since Moody's recently warned it might downgrade Bank of America /quotes/zigman/190927/quotes/nls/bac BAC -1.03% , Citigroup /quotes/zigman/5065548/quotes/nls/c C -2.05% and Wells Fargo /quotes/zigman/239557/quotes/nls/wfc WFC -1.59% as the government draws down its support for bank stocks. And of course, there are fears that "mark to market" accounting tricks have so obfuscated these companies' books that there could be billions in liabilities we don't even know about yet.
J.P. Morgan Chase executive officer Jamie Dimon asks Federal Reserve Chairman Ben Bernanke if reining in the banking system is slowing down economic growth.
If that doesn't spark fear in the hearts of most investors, what would?
But that fear could be a huge buying opportunity. Yes, there is risk in the financial sector but there is also the potential for long-term rewards. Remember in March 2009 when Citi stock tripled in three weeks? Or BAC, which jumped 400% in six months? Very risky calls for folks who bought in at the bottom "” and very profitable.
So if you are an aggressive investor, stop talking yourself out of banks for a minute and humor me as we cover 5 reasons banks could be strong buys right now:
Bank stocks are cheap by almost every metric. Shares of major financials are at the lowest prices of 2011, with most picks 10% to 15% away from a new 52-week low and trading near levels seen in the summer of 2009. Also, price-to-earnings ratios and price-to-book ratios are crazy low. Take a forward P/E of around 6.6 for Bank of America, compared with the current year P/E ratio for the S&P 500 of around 16.
Most banks are trading at about 9.4 times earnings, according to FactSet Research. Yes, stocks that set 52-week lows sometimes keep setting them. And yes, valuation metrics like P/E and price/book are best compared within the sector to avoid an apples-to-oranges comparison.
But that doesn't mean you should just dismiss such rock-bottom valuations out of hand. Read about 8 super-cheap information technology stocks on InvestorPlace.com.
Lots of folks like to point out that revenue for banks has been going nowhere and that most of the strides made on the earnings front have been from the release of so called "loan loss reserves." These rainy-day funds were set aside to deal with subprime mortgages and other bad debt "” but now that less of that cash is needed to offset losses, it is being returned to the bottom line.
Critics call this an accounting fiction that means profits aren't growing at all, but that doesn't tell the whole story. While lending hasn't picked up dramatically yet, the drawdown of reserves is a very encouraging first step. If banks were standing pat you could assume things haven't improved. That's not the case.
I started with a Buffett quote because, like many other investors, I place a lot of weight on what the Oracle of Omaha thinks. And he's buying banks. Consider that in Berkshire Hathaway's March 31 holdings report, Buffett's position in Wells Fargo & Co. grew yet again, to about 359 million shares from 342 million shares the previous quarter.
"Hong Kong stocks slip, with techs, airlines among losers; Hang Seng Index down 0.2% http://on.mktw.net/kyOjOn" 8:37 p.m. EDT, June 8, 2011 from MarketWatch
"Japan stocks fall, weighed by U.S. losses, stronger yen; Nikkei Average down 0.5% http://on.mktw.net/mas9Ak" 7:04 p.m. EDT, June 8, 2011 from MarketWatch
"The yen is on the rise again, but not for the reasons some people might have expected http://bit.ly/mwcJSp" 5:36 p.m. EDT, June 8, 2011 from MarketWatch
"52% of consumers think gas prices will stay flat or go down in the next month http://bit.ly/m9rUvl" 5:03 p.m. EDT, June 8, 2011 from MarketWatch
"Bill Gross, founder of PIMCO, has said that interest rates have nowhere to go but up http://bit.ly/mkIXpk #MIC2011" 4:34 p.m. EDT, June 8, 2011 from MarketWatch
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