How to Play the Bank Stock Panic

"Look Dave, I can see you're really upset about this. I honestly think you ought to sit down calmly, take a stress pill, and think things over."

-- Hal 9000 Computer, 2001: A Space Odyssey.

NEW YORK ( TheStreet) -- If you're thinking of dumping large bank stocks Tuesday in reaction to last week's FHFA lawsuit bombshell, you might want to reconsider.

Instead, take a deep breath and mull some other bank stock opportunities, because the automated traders and other market pros will clean your clock if you try to trade based on the lawsuit headlines.

It's perfectly understandable for bank stock investors to panic during the long holiday weekend.

After all, it was a week of maximum pain for Bank of America ( BAC), with the Federal Deposit Insurance Corp., a subsidiary of U.S. Bancorp ( USB) and Goldman Sachs ( GS) joining the throng of parties objecting to BofA's previous $8.5 billion settlement of Countrywide mortgage putback claims.

And of course, there was the Federal Housing Finance Agency's (FHFA) "Friday Night Massacre" of lawsuits against 17 large banks.

(In case any reminder is necessary, former Bank of America CEO Ken Lewis decided to buy Countrywide and its risk in 2008.)

Shares of Bank of America closed at $7.25 Friday, down 46% year-to-date. The shares traded for just 57% of their tangible book value as of June 30, according to SNL Financial, which is understandable, because neither the bank nor its investors can gauge the ultimate risk from all of the mortgage putback claims.

Of course, the company's tangible book value could decline over coming quarters with additional net losses, but the market has baked a significant cushion into Bank of America's stock price.

That plunge was recorded before the FHFA's demand that Bank of America buy back $57.5 billion in private-label mortgage-backed securities, including those sold to Fannie Mae ( FNMA) and Freddie Mac ( FMCC) by Merrill Lynch and Countrywide.

For investors who think that the FHFA lawsuits are just "leverage" for the regulators in negotiating a settlement with the nation's largest bank, another price drop on Tuesday could be just what the doctor ordered.

But it's a pretty risky play to assume that such a selloff would be the bottom for bank stocks. There are just too many uncertainties right now.

JPMorgan ( JPM) was trading for 1.1 times tangible book, according to SNL, but that was before the company faced a whopping demand from the FHFA to repurchase $33 billion in mortgage-backed securities, which among the 17 large banks sued by the regulator, is second only to the demand made of Bank of America.

Shares of Citigroup ( C) were also trading for just 57% of tangible book value according to SNL, and the FHFA is demanding a much smaller $3.5 billion in securities buybacks from Citi.

With last week's economic news dominated by the dismal announcement from the U.S. Labor Department that the U.S. economy added no new jobs during August, all eyes will be on President Obama when he delivers an address to a joint session of Congress on Thursday at 7 p.m. EDT. The president is expected to propose a large infrastructure program as part of his plan to spur job creation.

If the president also makes a public case for a broad settlement of the nation's housing mess, bank stocks could pop on Friday.

The FHFA's vicious blow against many of the largest banks that were part of the federal government bailout of 2008 through the Troubled Assets Relief Program, or TARP, underlines the need for presidential leadership in a coordinated government response to the overall housing mess.

It might be too late for President Obama to help his re-election prospects with a mortgage settlement, but the prospect of a mortgage settlement stabilizing stabilize housing prices, to clear out the inventory of empty homes, spur mortgage refinancing and get the economy moving again, could make the market very happy.

Looking beyond the almost daily seesaw for the largest banking names, there are dozens of banks that have achieved strong revenue growth in the weak economic environment and don't face the level of mortgage risk and headline risk faced by the largest and best-known financial names.
  • For starters, TheStreet has identified 10 Banks with Solid Revenue that have achieved real second-quarter revenue growth year over year, irrespective of the loan loss reserve releases that have been padding the earnings of most of the large banks.

    People's United Bancorp (PBCT) features prominently in this article, with second-quarter preprovision (for loan losses) net revenue more than doubling year over year, to $98.4 million, according to SNL Financial
  • Using the same criteria for year-over-year revenue growth, we also highlighted 10 Tiny Banks With Double-Digit Revenue Growth.
  • For investors seeking relatively safe banking plays that have posted strong earnings results right through the credit crisis, here are 5 Rational Bank Stock Picks for an Irrational Market.

    Bank of Hawaii (BOH) is one of the quality banking names featured here, with a return on average assets ranging between 1.08% and 1.70% over the past 10 quarters.
  • For investors looking for banks achieving the Holy Grail of solid loan growth in a tepid economic environment, here are 10 Banks Growing Business Loans.

    The winners on this list include M&T Bank (MTB), with commercial & industrial loans increasing 18% year-over-year, mainly from the acquisition of Wilmington Trust, and the ever-expanding First Niagara Financial Group (FNFG), which grew its C&I portfolio 62% year-over-year, mainly from its NewAlliance acquisition.
  • During times of uncertainty, dividends provide comfort to investors, especially when the payouts are generous and well-supported by earnings. Here are 10 Profitable Banks Yielding Over 4 Percent.

    Dime Community Bancshares (DCOM) is a nice, steady play here, with a dividend yield well in excess of 5%, and its 14-cent quarterly payout is only 39% of its second-quarter earnings of 36 cents a share.
  • Credit card lending is a great business to be in right now, especially if it's your focus. Here are 5 Profitable Credit Card Stocks With 3 On Fire.

    Discover Financial Services (DFS) is a world-beater, with a fiscal second-quarter operating return on average assets (ROA) of 3.76%, according to SNL Financial. American Express (AXP) ain't too shabby either, with a second-quarter ROA of 3.55%.

For investors who feed on risk, we used a "throw it against the wall and see what sticks" approach to identifying 10 Bank Stock Picks for Bottom-Fishing Investors, that trade below tangible book value. Then we highlighted 10 more.

Despite what could be a very rough Tuesday for investors holding financial names, there's always hope. The best thing to do is really put on your thinking cap, stick with quality for new picks, do as much of your own research as possible and, again, don't panic.

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-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

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.

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