This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

A Case for Bank Stocks

Lately Kovalski has been focusing on banks that seem to be prime candidates for takeovers. Acquirers often pay premium prices to purchase solid banks. During the financial crisis, merger activity slowed. But since then, the volume of activity has increased. Kovalski says that about 50 banks are taken over each quarter.

Many institutions are selling themselves because it has become difficult for small institutions to cover the costs of complying with new regulations. "A small community bank may have to hire an additional person to handle compliance issues, and that can be a difficult burden" says Kovalski.

A favorite holding is Southern National Bancorp of Virginia (SONA), which has 19 branches in Virginia and Maryland. The bank has been expanding by acquiring branches of troubled competitors. Kovalski figures that the bank could be an acquisition target. The company is headed by a husband-and-wife team who earlier built up another bank and sold it.

Another way to benefit from a rise in bank shares is by holding Oakmark I (OAKMX), a large blend fund that has 28% of its assets in financial shares. During the past five years, the fund returned 11.% annually, outperforming the S&P 500 by more than 4 percentage points. The fund's top holdings include JPMorgan Chase (JPM) and Wells Fargo (WFC).

Portfolio manager Bill Nygren looks for growing companies that sell for discounts of at least 40% to their fair values. Nygren is particularly keen on Bank of America (BAC).

"The company has gotten off the critical care list and is now a sustainable business," he said last week in a talk at the Morningstar Investment Conference in Chicago.

Nygren said that Bank of America has a solid balance sheet, but that the shares sell for only 70% of book value. He said that investors are wary because they fear that the volume of loans cannot increase in the sluggish economy. But Nygren said that the company can produce solid profits, even if the revenue does not increase. "At today's prices, they will have enough capital to buy back 10% of their shares each year," he said.

With the buybacks, the company could reduce the number of its shares outstanding. That would increase earnings per share and help to boost the stock price.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,156.85 +24.88 0.15%
S&P 500 2,001.57 +2.59 0.13%
NASDAQ 4,562.1890 +9.43 0.21%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs