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5 Reasons You Shouldn’t Fear Buying Big, Bad Banks

Bargain valuations, Buffett bode well for beleaguered financials

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#3 Buffett is Buying Big-Time

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 grew yet again, to about 359 million shares from 342 million shares the previous quarter. And Berkshire owns 5.7 million shares of Wesco Financial Corp. (NYSE: WSC) and is trying to acquire the rest of the company. That’s in addition to huge stakes in financial stocks American Express Co. (NYSE: AXP) and Bank of New York Mellon Corp. (NYSE: BK), and preferred shares in Goldman Sachs (NYSE: GS).

Yes, other managers of so-called “smart money” are on the other side, with hedge fund investors like John Paulson and David Tepper slowly moving out of banking stocks. But Buffett isn’t known for his short-term sensibilities; he is loaded in banks for the long term, and that could be a bullish sign for the sector despite some immediate challenges. Read: Should You Follow Buffett Into MasterCard.

#4 Will Regulation Be That Bad?

There are legitimate concerns that FinReg oversight will cut deeply into revenue, from proprietary trading profits to overdraft fees. The new regulations are set to go into effect on July 21 — or are they? Sen. Jon Tester, a Democrat from Montana, has proposed delaying some rules by 15 months. But even if this reprieve never comes, it’s important to remember that banks aren’t going to be surprised by this. In fact, the sell-off in shares should tell you that the bad news has already been priced in. Yes, it is uncertain just how big of a bite regulations will take out of already sluggish revenue streams at major banks. And yes, Wall Street hates uncertainty. But sure things are rarely profitable investments. A calculated risk by buying bank stocks now could pay off if the impact of regulations is eased or not as severe as some have feared.

#5 Dividends Healing – Slowly

The Federal Reserve signed off on bigger dividend payments from the big financial stocks early in 2011, and now major banks are offering very respectable income potential. Take JPMorgan Chase (NYSE: JPM), which hiked its dividend from a nickel to 25 cents each quarter. That’s a yield of about 2.4% at current valuations. You can bet that banks are eager for another round of dividend increases, too, not just to entice income-oriented investors, but also to prove that their new payouts are secure and growing. Read: 3 Dividend Stocks Smoking the S&P 500.

As of this writing, Jeff Reeves owned a long position in Bank of America stock. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

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