Bank stocks have been lagging big time recently. Since Jan. 1, Bank of America (BAC), JPMorgan Chase (JPM) and Citigroup (C) have all lost ground while the S&P 500 has tacked on roughly 7% in the same period.
But some of these underperformers could be turning around soon. With the Federal Reserve continuing its tapering efforts and the fact it’s likely to cancel all “quantitative easing” bond buying come October, there is a decent chance that rates could tick slightly higher and improve the net interest margin on bank loans.
Additionally, continued long-term improvement in the unemployment rate, consumer spending and business investment is bullish for lending trends — even if the pace of improvement isn’t quite as satisfying as many investors would have liked to see during the past few years.
And besides, if you’re selective, there is a group of financial stocks that have actually been swimming against the current holding back the rest of the sector.
Just because there are problems across most bank stocks doesn’t mean that a selective investor can’t hone in on the sector’s few diamonds in the rough.
So if you’re interested in bank stocks, where should you look? Here are three ideas:
Bank Stocks to Buy Now – Wells Fargo (WFC)
Wells Fargo (WFC) quickly emerged as one of the strongest bank stocks in the wake of the financial crisis. Though it crashed with its fellow financials in 2008 and 2009 — and frankly, with the rest of the whole stock market — shares quickly bounced back and as of last year had eclipsed pre-crisis highs.
Since then, WFC stock has moved even higher despite a sluggish performance from the rest of the financial sector; Wells Fargo stock is up more than 12% in 2014 — almost twice the S&P 500.
Why? Well, for starters, Wells doesn’t have the same level of brand tarnish as BofA and Citi do after a crash to single-digit share prices under the weight of bad mortgages. Furthermore, while Citigroup and Bank of America stock both continue to pay the meager penny-per-share dividend thanks to poor results in Federal Reserve “stress tests,” WFC stock actually yields a nice 2.7% in dividends. And it’s worth noting that while the bank did cut distributions during the financial crisis, its current dividend of 35 cents per share each quarter is actually higher than the 34 cents it paid right before the mortgage meltdown forced it to slash payments.
WFC is a bit pricey now that it trades for a price-to-book ratio of about 1.6. But it if you’re going to play in the admittedly troubled waters of the financial sector, then it may be prudent to pay a small premium for a quality stock instead of digging around in the mud for a bargain buy that may have a rather nasty balance sheet.
Wells Fargo stock has proven itself since the financial crisis, and investors can have great confidence in this bank stock going forward, too.
Bank Stocks to Buy Now – Blackstone Group (BX)
The Blackstone Group (BX) isn’t exactly a big bank, but it’s a big financial stock — namely, it’s a money management and private equity group that is one of the biggest names in capital markets. While the 2008 and 2009 downturn was obviously ugly for Blackstone … the resulting recovery for the economy, the financial sector and the broader investing community has resulted in a huge run for BX stock.
Blackstone is up roughly 50% in the last year, and has tripled from its 2012 lows. And thanks to the structure of the financial stock as a partnership, dividends have increased dramatically in the same period — from a quarterly payout as low as 10 cents in mid-2012 to a payday of 58 cents to start 2014.
Of course, it’s difficult to calculate yield based on these volatile payments, since payments just dropped to 35 cents per share last quarter. But adding the last four dividend payments to BX stockholders up gives you add up to $1.39 — good for a 3.9% yield at current prices.
BX saw its assets under management grow to record levels in 2013 on the back of a roaring stock market, and there is nothing preventing Blackstone from continuing that trend going forward. A robust IPO and private equity market coupled with improving investor sentiment should help both sides of this company’s business via both money management as well as business investment deals.
Bank Stocks to Buy Now – Toronto-Dominion Bank (TD)
Toronto-Dominion Bank (TD) is, as the name implies, headquartered in Canada and focused on our neighbors to the north (as well as the U.S.).
And this mere trick of geography is actually a huge plus to many investors because Canadian bank stocks fared better then their American peers during the crisis, and have been seen as less risky without the same exposure to derivatives, bad mortgages or high-risk trading arms.
Consider that while shares of TD stock did tank in 2009 like so many other financials, the company quickly surpassed pre-crisis highs by 2010 and has been setting new all-time highs like clockwork for the past year or two.
All this with a 3.4% dividend yield to boot, after a recent dividend increase from 43 cents to 47 cents per share quarterly.
Now, like WFC stock there is a premium to be paid for this kind of high-quality financial stock; TD stock right now trades for about twice its book value.
However, if you’re looking for quality large-cap financial stocks that should withstand any trouble the market throws their way and rise in the coming years as the U.S. and global economy recovers, it’s hard to find a more solid play than Toronto-Dominion Bank.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at [email protected] or follow him on Twitter via @JeffReevesIP.