Update: Betting on bank stocks

(Fortune Magazine) -- What we said in "Why Banks Beat Bonds" (Aug. 6) we made the case for buying three big bank stocks: Bank of America (Charts, Fortune 500), Citigroup (Charts, Fortune 500), and Wachovia (Charts, Fortune 500). Our argument rested on the fact that they had low price/earnings ratios, high dividend yields, and solid growth prospects. And they would not be buried by big losses in subprime mortgages, we declared.

What happened: WHAT HAPPENED Our article appeared just as the subprime crisis was coming to a boil. While the timing couldn't have been worse, our mini-portfolio has held up relatively well. As of Oct. 5, Bank of America is actually up $3, to $53. Wachovia has slipped $1, to $52. Citigroup, which warned of sharply lower third-quarter profits, is down $5 to $48. All three continue to pay their hefty dividends, of course. And our rationale for choosing these stocks remains intact. All three still boast extremely low P/E ratios and strong earnings power. Bank of America has an unmatched national franchise. Wachovia is being unjustly punished for its 2006 purchase of Golden West Financial, which is one of the nation's most conservative mortgage underwriters. And Citigroup, the international colossus, is on a cost-cutting drive that should improve earnings. Plus, any management shakeup that may be in the offing is likely to boost the stock.