With markets at record highs, is now a good time for you to buy bank stocks?
Compared to the market overall, bank stocks remain inexpensive. Not only that, macro factors continue to be on the side of the banking space. As InvestorPlace’s Luke Lango wrote Feb. 10, “buy bank stocks this year because the U.S. economy is improving.” With unemployment at record lows, manufacturing at all-time highs and corporations increasing their capital expenditures, the environment is perfect for major U.S. banking stocks.
However, which stocks should you add to your portfolio? Taking a look at large-cap banks, there are three names that stand out as opportunities.
So, let’s dive in, and see why these are the three bank stocks to buy as the market trends higher.
Bank Stocks to Buy: Bank of America (BAC)
Bank of America (NYSE:BAC) stock is trading close to its 52-week high, and there’s good reason why shares could head higher.
In January, BAC stock posted strong results for the last quarter of 2019. Furthermore, analyst estimates call for earnings per share (EPS) to grow from $2.75 in 2019 to $3.03 in 2020; In other words, 10.2% earnings growth. Not exactly a high-flyer, but impressive nevertheless for a slow-growing, blue-chip bank.
With a forward price-to-earnings (P/E) ratio of 11.3, shares trade at slight discount to JP MorganChase (NYSE:JPM) — which has a forward P/E ratio of 12.4. If results meet projections, investors may reward BAC stock with a valuation on par (or perhaps higher) than its major banking peer.
However, multiple expansion isn’t the only thing that could move the needle for BAC stock. Bank of America boosted its dividend last year, and there could be room for additional dividend growth. Couple that with the bank’s stock buyback policy, and there’s plenty of reason why shares could move higher.
Don’t expect BAC stock to make parabolic moves. But, with a reasonable valuation and a strong “return of capital” policy, BAC stock remains one of the best bank stocks to buy in today’s market.
Citigroup (NYSE:C) stock may have rallied 53.5% in 2019. But thanks to a low valuation, there could be additional runway. Citigroup shares remain cheaper than money center peers like BAC and JPM. With a forward P/E of 9.2, C stock is far behind the rest of the pack.
At first glance, there could be good reason why investors discount Citigroup stock. Citigroup lags behind JPMorganChase on metrics like return on equity. But Citigroup has been no slouch in terms of overall performance. Like its peer Bank of America, C stock beat earnings estimates last month — and year-over-year, Citigroup’s EPS grew 31.1% in Q4 2019.
If Citigroup continues to post strong quarterly results, it wouldn’t be surprising if C stock moves further upward. With plenty of room valuation-wise compared to rivals, Citigroup shares could see another year of strong performance. Also, like Bank of America, Citigroup has an aggressive dividend and share buyback policy. Only Wells Fargo (NYSE:WFC) has a higher net payout yield among the major bank stocks.
C stock may not be as beloved as BAC and JPM, but consider this the contrarian play among the best bank stocks to buy.
Fifth Third Bancorp (FITB)
After taking a look at some money-center banks, let’s consider a more regional large-cap bank stock. Ohio-based Fifth Third Bancorp (NASDAQ:FITB) is another “cheap” bank stock relative to its peers. Large regional names, like PNC (NYSE:PNC) and Truist (NYSE:TFC) have forward P/E ratios around 13. On the other hand, FITB stock trades for 10 times forward earnings.
I should note it may not be apples-to-apples to compare FITB stock to PNC and TFC. The latter two names are much larger than Fifth Third Bank. Yet, looking at performance metrics, Fifth Third posts some strong figures.
The bank’s net income margin is 32%, on par with PNC, and well above TFC’s net income margin of 27%.
FITB stock also boasts a return on equity of 13.4%. On the other hand, there’s some rationale behind giving shares a lower valuation. Loan growth performance remains a concern, and Fifth Third also missed on estimates when it reported quarterly results last month.
A more long-shot catalyst, but Fifth Third could see additional M&A activity. The bank may still be absorbing its recent acquisition of MB Financial. Yet, another big merger could help Fifth Third catch up scale-wise to PNC and Truist. In turn, this could help FITB stock gain a higher valuation.
Compared to the first two names in this article, Fifth Third may be out of its league. Overall, though, FITB stock remains a great bank stock to buy in today’s market.
Thomas Niel, InvestorPlace contributor, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.