Barron’s Says Banks Are Super Cheap

Oct 15, 2011
J. Webster
Comments Off on Barron’s Says Banks Are Super Cheap

I guess if you were really bullish about the banks, and agreed wholeheartedly with Barron’s, you’d go ahead and buy the Direxion Daily Financial ETF, which is triple times a basket of the bank stocks. The ticker is FAS. But here’s a quick snapshot of what Barron’s said about the sector:

The stocks—major banks, regional banks and trust banks, as well as life insurers—look appealing, with many trading at or below tangible book value, a conservative measure of shareholder equity, and at single-digit price/earnings multiples. The stocks are even cheaper based on stated book value, which includes goodwill from acquisitions. Most stocks now discount permanently low returns — an overly bearish scenario — just as they reflected permanently high returns not so long ago. Dividends are often in the 2% to 3% range — and probably heading higher.

Bullish investors are excited because it is unusual to find low valuations in the sector based on both book value and earnings. At the 2009 market low, financials were valued cheaply based on book value but many were losing money and needed to raise tens of billions of dollars of new capital.

“There is massive undervaluation across the spectrum,” says Matthew Lindenbaum, a principal at Basswood Partners, a New York investment firm. “People have been running away from the group, and investors are underweighted in financials. You can put together a diversified portfolio of financials that should do well in three years. It may require a little patience.” He points to Goldman (ticker: GS), Morgan Stanley (MS), State Street (STT) and Comerica (CMA). (Barron’s)

While Barron’s notes all the risk with the banks, from public outrage and protests to to high unemployment to European debt fears to litigation worries from their 2007 and 2008, they believe most of the bad news is built into these stocks and there’s really not much downside risk. Banks have built up capital reserves just for litigation, for example. Also, they’re thinking more long term with this call, looking outwards to next year. They just might be write but it’s a painful time to hold bank stocks unless they have a decent dividend yield.

What do you think? Are you buying bank stocks and buying what Barron’s has to say?

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