Bank on Consolidation

This column was originally published on RealMoney on March 28 at 2:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Over the years, I've written about individual banks or groups of banks -- most recently on March 16, when I wrote about British banking giant Barclays(BCS Quote). Well, I'm not the only one now paying attention to Barclays. It recently announced it will purchase Dutch banking giant ABN Amro(ABN Quote), and the banking world is abuzz with speculation.

Observers believe that because ABN is now in play, other banks may try to snatch it away from Barclays, with Citibank(C Quote) frequently mentioned. The banking industry has been consolidating for years, and this newest foray into consolidation may trigger another round.

I don't try to guess which banks might be the hunters or the hunted, but right now several banks rank highly with my guru strategies. Add in the current takeover fever, and I believe parking some money in the banking sector could pay significant returns later. Let me tell you about several banks (in addition to Barclays) that the strategies like.

Hot for HSBC

One is British HSBC Holdings(HBC Quote). This is liked by three guru strategies, including the one I base on Peter Lynch's writings. The bank's growth rate, based on the average three-, four- and five-year historical growth rates, is a robust 26.2%, while its price-to-earnings ratio is a modest 12.3. This produces a PEG (P/E relative to growth) ratio of 0.47. That is a very impressive number and suggests that the stock's current price is a real value.

The strategy that follows the thinking of James P. O'Shaughnessy likes HSBC because it has cash flow per share far in excess of the market's mean cash flow per share ($8.21 vs. $1.61 for the S&P 500 companies). It also has plenty of shares outstanding (2.3 billion), has lots of sales ($75.9 billion) and pays a hefty dividend (8.15%).

The strategy I base on Martin Zweig's approach to investing also gives HSBC high grades. Variables in the bank's favor:

• Revenue and EPS growth rates that are in balance;
• positive earnings per share;
• EPS that are growing; and
• EPS that have increased in each of the past five years.