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Five years ago, the banking industry was on its knees. My, how times have changed. Some troubled institutions, such as Wachovia and Washington Mutual, did bite the dust, but others have cleaned up their books.
According to the Federal Deposit Insurance Corp., return on equity (ROE) for banks dropped from about 12% in 2007 to 1.4% in 2008 and a low of -3.68% in 2009, and spent the last several years recovering to 10.44% in 2013. That's not quite where things were in the years before the Great Recession when ROE was generally a bit above 12%, but it is quite a reversal of fortune, nonetheless.
The banks are not out of the woods, though. They have improved their profitability substantially (in part due to declines in loan-loss provisions), but top-line revenues have been largely flat. Yet their fairly solid financial footing makes them good candidates for those who need financial institutions in their portfolios in order to achieve asset diversification.
To choose stocks, I rely on a series of computerized strategies I created based on the writings of some of Wall Street's most savvy investors. Peter Lynch is one of history's most storied mutual fund managers, and his strategy currently favors several regional banks. These are all worth considering as investments.
The strategy's most important variable is the P/E/G ratio, which is price-to-earnings relative to growth. Growth is a valued factor when analyzing how much a stock is worth, and the P/E/G is a way to measure the cost of growth to the investor.