6 bank stocks worth buying
Many bank stocks are at multi-year lows and more trouble lies ahead. But some value fund managers argue that not all banks are doomed.
NEW YORK (CNNMoney.com) -- Banks have got investors running scared.
From writedowns to dividend cuts to dilutive stock offerings, it's no wonder that so many banks have seen their market values evaporate.
It seems almost inevitable that more difficulties lay ahead for the most troubled banks, including companies like Wachovia and Washington Mutual, given further fallout both in the housing market and the broader economy.
But even with all these tales of woe, some value fund managers say there may be a handful of bank stocks that are now too cheap to pass up.
"There are some good long-term values out there," said Bill Andrews, a portfolio manager for the Pittsburgh-based money manager C.S. McKee. "The question on everyone's mind is: 'Do they get cheaper before they go up?' "
Even though a significant piece of its lending operations are in California, one of the regions hit hardest by the housing crunch, tough underwriting standards managed to save the San Francisco-based bank from the problems facing many of its peers.
"It's got one of the strongest balance sheets and one of the best management teams," said Jeff Auxier, president of the Lake Oswego, Ore.-based Auxier Management, which operates the Auxier Focus Fund. The fund currently owns shares of Wells Fargo and is considering buying more.
To be sure, analysts expect the bank to report a decline in profits in the second quarter and for the full year. And with shares of the San Francisco-based firm trading at 1.8 times its book value, compared to an average of about 1.2 for financial services stocks, it's far from cheap on a relative basis. (Book value is a company's assets minus its liabilities and is widely used by analysts as a way to value bank stocks.)
But Auxier notes that Wells Fargo chairman Richard Kovacevich bought more than 40,000 shares just over a week ago. So that could be a sign that he thinks the stock is close to a bottom.
For Sovereign Bancorp (SOV, Fortune 500), the biggest uncertainty may be how much deterioration its home equity portfolio endures, says Bernard Horn Jr., portfolio manager at the Boston-based Polaris Capital Management, which operates the Polaris Global Value Fund and manages about $4 billion.
The company, which has a network of about 750 branches in the Northeast, announced plans last month to raise $19 billion.
But investors reacted much differently to this news than they did when other banks disclosed that they need to raise more cash.
The stock has gained about 14% since it raised the money. Yet, shares of Sovereign still trade at only about two-thirds of its book value.
And given the hands-on approach the company's CEO Joseph Campanelli has taken to tackle the credit crisis, Horn believes that Sovereign, which his fund currently owns shares of, could be a big winner.
"In 3 to 5 years, one could look back and say it was a good time to buy this one," says Horn.
Buying bank stocks could be more of an art than a science nowadays, argues Auxier. Sure dividends, price-to-earnings and other key metrics matter, but a better guide may be finding a lender "that didn't go crazy and didn't lose discipline" like Washington Federal (WFSL).
Much of the Seattle-based thrift's business is tied to real estate, including first mortgages on single-family homes as well as construction and home equity loans.
But unlike its peers, it exercised caution when it came to the housing boom, notes Auxier. Last quarter, the company said its non-performing assets reached just 0.58% of total assets. That's far below what was reported by its cross-town rival Washington Mutual, whose nonperforming assets grew to 2.87% of its total assets.
Investors certainly won't score the same deep discount as with other firms by buying its stock, as the stock trades at 1.37 times its book value, more than twice what the average savings and loan stock is priced at.
But they will own a piece of a strong "plain-vanilla" lender, said Auxier, with more than 100 offices in seven states that reported higher earnings last quarter, and is expected to do so again later this month. It also has an attractive 4% dividend yield that looks pretty secure.
Bank of America (BAC, Fortune 500) can't seem to catch a break lately. Its stock now hovers at 7-year lows and the company can't quash lingering doubts that the planned Countrywide merger will fall apart. What's more, speculation persists that the company could cut its dividend.
But Bill Andrews of C.S. McKee is still a believer. He notes the stock is currently priced below its book value and that the company boasts an impressive consumer banking footprint that will likely grow further after the Countrywide acquisition is completed.
As for talk about cutting the company's impressive 8.9% annual dividend yield?
"[It] certainly is a possibility, but even if you cut it in half, that's still better than a 4% yield," said Andrews.
Like Icarus, shares of SunTrust (STI, Fortune 500) have come hurtling back towards Earth. A year ago, shares of the Atlanta-based bank were in the stratosphere, drifting just north of $90 a share. Just last week they tumbled below $44 a share -- their lowest level in eight years.
Even though the firm remains dogged by writedowns and rising loan loss reserves, it has a broad footprint in the Southeast, one of the fastest growing areas of the country, says Andrews.
What's more, if the bank does become a takeover target, as has been rumored recently, shareholders could get rewarded with a nice premium.
Even if it doesn't, investors buying the stock now can take comfort in knowing they scooped it up at a pretty good discount, as it currently trades at about 0.9 times its book value.
A trust bank by nature, the company has delivered a steady increase in profits since Bank of New York completed its merger with Mellon Financial last July. In the most recent quarter, the company saw its earnings surge by 72%, as market volatility revved up results in its asset servicing and clearing businesses.
While the company's asset management business got dinged in the previous quarter, these two businesses have kept Bank of New York Mellon's results chugging along, notes Mark Boyar, president and chief executive at the New York City-based Boyar Asset Management, which oversees over $600 million and owns Bank of New York Mellon stock.
The steady performance comes at a price as the stock trades at a premium of 1.7 times book value. But the dependability of the firm's earnings makes the bank a better bet than most in a sector that is suffering a crisis of confidence.
What's more, during the company's most recent earnings conference call, Bank of New York Mellon CEO Robert Kelly suggested the company will remain "opportunistic" and look for possible acquisitions. So this bank may be able to take advantage of the downturn to grow its business.