NEW YORK (
) -- If you are a conservative long-term investor, the list of A-rated bank stocks below indicates that you can have your cake and eat it too.
takes a very conservative, long-term approach to stock ratings, placing its emphasis on total returns as well as revenue trends, capital strength and dividends. The ratings also consider short-term performance, financial stability and stock-price volatility.
A rating of B-minus (Good) or higher translates to a "buy" rating.
Limiting the rated stocks to those that are actively traded with average daily volume of at least 40,000 shares, here are the four bank stocks rated A-plus (Excellent). All have achieved strong returns on average tangible common equity (ROTCE) through the third quarter of this year and over the previous two years, according to data provided by Thomson Reuters Bank Insight. Most trade at premiums to peers, based on forward price-to-earnings ratios:
- Prosperity Bancshares (PB) - Get Report of Houston. The shares closed at $63.76 Monday and trade for 16 times the consensus 2014 earnings estimate of $2.82, among analysts polled by Thomson Reuters. The company's ROTCE for the first three quarters of 2013 was a very strong 20.88%, following ROTCE of 19.84% in 2012 and 22.80% in 2011, according to Thomson Reuters Bank Insight. On this basis, Prosperity Bancshares has been the strongest performer for the past three years among the banks listed here.
- Home Bancshares (HOMB) - Get Report of Conway, Ark. The shares closed at $33.75 Monday and trade for 19.6 times the consensus 2014 EPS estimate of $1.72. The ROTCE for the first three quarters of 2013 was 15.89%, improving from 15.09% in 2012 and 13.49% in 2011.
- Community Bank System (CBU) - Get Report of DeWitt, N.Y. The shares closed at $36.75 Monday and trade for 17.3 times the consensus 2014 EPS estimate of $2.13. The company's ROTCE for the first three quarters of this year was 17.54%, compared to 14.95% in 2012 and 17.67% in 2011.
- First Financial Bancshares (FFIN) - Get Report of Abilene, Texas. The shares closed at $61.79 Monday and trade for 21.9 times the consensus 2014 EPS estimate of $2.82. The company's ROTCE for the first three quarters of 2013 was 16.33%, increasing from 15.3% in 2012 and 15.67% in 2011.
There's no question that we're looking at a high quality group of stocks on the above A-plus list. The relatively high forward P/E valuations reflect the amazing run the stock market has had this year and in 2012 -- especially bank stocks.
For investors looking for possible bargains among highly rated bank stocks, we have moved down a notch and isolated the cheapest of these to forward earnings. Here are the five actively traded bank stocks rated A (Excellent), with the lowest forward price-to-earnings ratios, sorted by descending forward P/E:
1st Source Corp.
of South Bend, Ind., closed at $31.85 Monday. The shares have returned 48% this year and trade for 14.0 times the consensus 2014 EPS estimate of $2.28. For the first three quarters of 2013, the bank's ROTCE was 11.19%, improving from 10.53% in 2012 and 11.05% in 2011.
of Wheeling, W.V., has seen its stock return 34% this year, through Monday's close at $29.01. The shares trade for 13.0 times the consensus 2014 EPS estimate of $2.24. The bank's ROTCE for the first three quarters of 2013 was 15.62%, improving from 12.71% in 2012 and 12.49% in 2011.
Pacific Premier Bancorp
of Irvine, Calif., closed at $14.13 Monday and traded for 12.4 times the consensus 2014 EPS estimate of $1.14. The company's ROTCE for the first three quarters of 2013 was 11.19%, down from 11.96% in 2012 and 12.48% in 2011. This year's performance has reflected higher provisions for loan losses, mainly to cover loans acquired through the purchase of failed banks from the Federal Deposit Insurance Corp.
closed at $43.41 Monday. The shares trade for 10.8 times the consensus 2014 EPS estimate of $4.01.
Wells Fargo has consistently outperformed the other members of the "big four" U.S. banking club, which also includes
Bank of America
. The company's ROTCE for the first three quarters of 2013 was 17.86%, increasing from 16.70% in 2012 and 16.50% in 2011.
Despite the strong performance and much lower level of regulatory pressure than JPMorgan Chase and Bank of America, Wells Fargo is not the most expensive stock among the "big four" on a forward P/E basis. That prize goes to Bank of America, with shares trading for 11.1 times the consensus 2014 EPS estimate of $1.34, based on Monday's closing price of $14.92. BAC's ROTCE for the first three quarters of 2013 was 7.44%, which was a major improvement from 2.96% in 2012 and 1.08% in 2011. Bank of America is rated a C-plus (Fair) by
The cheapest actively traded A-rated bank stock on a forward P/E basis is
Capital One Financial
. The stock closed at $69.42 Monday and traded for 10.0 times the consensus 2014 EPS estimate of $6.96. The company's ROTCE for the first three quarters of 2013 was 17.02%, improving from 14.64% in 2012 and 20.35% in 2011. The relatively weak performance during 2012 reflected extraordinary credit expenses following Capital One's purchase of
U.S. credit card portfolio.
-- Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.