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TheStreet Open House

3 Bank Stocks Cheap to Long-Term Earnings From JPMorgan

Stocks in this article: KEYCMAZIONSBNYFRCWFCI:BKX

NEW YORK ( TheStreet) -- Some regional bank stocks with relatively high valuations to 2014 earnings look like bargain opportunities for investors with much longer-term horizons, according to JPMorgan Chase analyst Steven Alexopoulos.

In several recent articles we've discussed the relatively high valuations of many regional bank stocks to 2014 earnings, while a company with industry-leading returns on equity (even with excess capital) like Discover Financial Services (DFS) trades at a considerably lower forward price-to-earnings ratio.

Alexopoulos in a report on Monday outlined "30 bank stock ideas across 10 portfolio strategies." For example, his pick for investors looking for a small-cap bank growing at a very fast pace by focusing on loan growth is Signature Bank (SBNY) (SBNY). For a mid-cap "pure play on high net worth segment and Silicon Valley growth," the analyst's favorite pick is First Republic Bank (FRC) of San Francisco.

Signature Bank's stock closed at $105.56 yesterday. Alexopoulos rates the stock "overweight," with a December 2014 price target of $113.00. First Republic closed at $50.43. FRC is also rated "overweight" by Alexopoulos, with a price target of $60.00. For more on both of these fast growers, please see 'Decent' Loan Growth Best Feature of Regional Banks' Q3 Earnings.

"While it has been tough to get excited over the regional banks as a whole given relatively rich sector valuation levels combined with a still weak fundamental outlook, taking a bottoms-up approach we find many attractive long opportunities over various time horizons as well as several short and pair trading ideas," Alexopoulos wrote.

Bank stocks have been on fire this year, with the KBW Bank Index (I:BKX) rising 28%, adding to last year's 30% gain. Investors are now quite focused on the Federal Reserve, wondering just when the central bank will curtail its purchases of long-term securities, which have been running at a rate of $85 billion per month since September 2012, in an effort to hold-down long-term interest rates. Last week's surprisingly strong report of job creation in the U.S. caused JPMorgan's economists to move up their expected timeline for Fed tapering of bond-buying to January from March-April.

The Fed's main policy tool, the short-term Federal Funds Rate, has been held in a target range of zero to 0.25% since late 2008. The Federal Open Market Committee has repeatedly said that assuming inflation is held in check, the Federal Funds Rate will not be raised until the U.S. unemployment rate falls below 6.5%. The October unemployment rate was 7.3%. While we can't predict just when the U.S. will move into a "more normal" interest rate environment, "the market seems increasingly convinced that the long-term direction of interest rates is higher, a positive catalyst for banks," according to Alexopoulos.

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