Six Bank Stocks With Long-Term Potential

Bank stocks hit the bottom on March 6. We just didn't know it at the time.

That was the day TheStreet.com highlighted six bank stocks that appeared to be undervalued based on last year's earnings and loan quality, and low price-to-book ratios. Five of the stocks lagged their benchmark indexes from March 6 to April 29.

This chart compares the stocks' total returns with relevant indexes:

Total Returns for Six Bank Stocks Bloomberg

After analyzing the 20 largest U.S. bank and thrift holding companies by market capitalization, we picked six that hadn't received government aid from the Troubled Assets Relief Program, or TARP. Their ratios of bad loans to core capital and reserves were less than 10%. The banks also generated earnings last year, suggesting their dividends are safe.

Wild Ride for Indexes

None of the stocks we picked performed as well as the S&P 500 Financial Index, which rose almost 80% between March 6 and April 29. That index includes the epically battered Citigroup (C Quote), whose shares tripled during the period. Members Bank of America (BAC Quote) and Wells Fargo (WFC Quote) more than doubled in value.

In the last article, we mentioned the headline risk companies take by accepting TARP money. Here, we see how an investor with excellent timing could make a lot of money flipping the shares of distressed holding companies.

My colleague Kevin Baker recently offered his take on best-performing bank ETFs:

Financial Sector ETF Rally Off Bottom Bloomberg

He also compiled a more extensive list of mutual funds that invest in banks.