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'Quality' Bank Stocks Gain in Favor

Stocks in this article: BAC C WFC USB FITB KEY CMA

But the relatively low valuations for Bank of America and Citigroup reflect the high level of price volatility over the years, along with weak earnings. Bank of America's 2012 return on average assets (ROA) was 0.19% during 2012, according to Thomson Reuters Bank Insight. The ROA has ranged from a negative 0.09% to 0.22% over the past five years.

Citigroup's 2012 ROA was 0.41%, and the company's ROA has ranged from a negative 1.28% to 0.57% over the past five years.

Mutascio's point about the market's failure to place a premium on quality is supported by a look at forward price-to-earnings ratios for the nation's largest regional banks, while also considering earnings strength and consistency.

Shares of Wells Fargo (WFC) closed at $34.88 Friday, trading for 9 times the consensus 2014 EPS estimate of $3.88. The amazing thing about the stock is that it trades at a slightly lower P/E than Bank of America, despite being a much less risky play for investors. The company's 2012 ROA was 1.41%, and the ROA has steadily risen over the past five years, from a low of 0.44% in 2008. In fact, 2008 was really the only "bad year" for the company in recent memory. Aside from a relatively low ROA of 0.97% in 2009, the ROA has been well above 1% over the past 10 years.

Shares of U.S. Bancorp (USB) of Minneapolis closed at $33.65 Friday and traded for 10.2 times the consensus 2014 EPS estimate of $3.30. While that's a bit of a premium above the market's forward P/E for Bank of America, USB has been an even stronger earnings performer than Wells Fargo. The company's 2012 ROA was a solid 1.62%. Over the past 10 years, U.S. Bancorp's ROA only slipped below 1% in 2009, when it was 0.82%, and the ROA was above 1.5% each year except for 2009 and 2010, when it was 1.16%.

Two Upgrades to 'Buy'

Mutascio on Monday upgraded Wells Fargo and U.S. Bancorp to "buy" from "hold" ratings.

The analyst's price target for Wells Fargo is $42, and he said the stock's discount to lesser-performing peers "is based on fears that the company is over-earning in the current mortgage banking environment." Mutascio disagrees with that notion, and said "the company has several material offsets to lower origination activity and gain on sale margins."

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