Rarely has a sector gone through a more tumultuous five-year stretch than financials have since 2008 -- especially the major banks. After surviving a near death experience thanks to intervention from Washington and the Fed's largesse, they are on the road to recovery. They still have a few more years of vilification and litigation but the worse is certainly behind them. The recently completed stress tests and the loosening of the reins for returning some additional cash to shareholders seems to have marked "the end of the beginning" for the major banks.
The road ahead will not be easy, as these institutions will need to cope with new regulations, settle continuing litigation, ride the fits and starts of a still recovering housing market and endure the occasional scapegoating before a congressional committee. However, the next five years certainly look much brighter than the ordeal they just survived.
The major banks can expect to continue to enjoy supportive Federal Reserve programs, a vastly improved housing market and the eventual widening of the yield curve over the next few years. In an ironic twist of fate, they also now have a bigger share of the overall banking market than before the crisis started. Given all this, here are two major banks I like for substantial upside over the next few years. Neither should be expected to duplicate the huge gains of the last 18 months, but I expect both stocks will be trading significantly higher in two to three years.
This article originally appeared on March, 15, 2013 on RealMoney. To read more content like this + see inside Jim Cramer's $3 Million portfolio for FREE Click Here NOW.Shares of Bank of America ( BAC) are up substantially since I dipped a toe into the stock at just above $5 a share in late 2011. The Fed just gave the bank permission for $5 billion in stock repurchases and to be able to redeem $5.5 billion in preferred stock. The stock is currently selling at just over 9x 2014's projected earnings. The bank has a significant mortgage business and should be a primary beneficiary of a rebounding housing market. Over the next few years, I expect the company to resume a higher dividend level, settle remaining litigation and possibly sell or spin off Merrill Lynch, which never was a good cultural fit and always struck me as a shotgun wedding. I don't expect BAC to get back to the $40 level, which is where it traded it before the 2008 crisis. However, I would not be surprised if it at least approached book value over the next two to three years. Without assuming any growth in that metric, this would mean roughly $20 a share.