Article from http://www.usatoday.com/story/money/columnist/waggoner/2013/05/09/bank-stocks-investing-waggoner/2148149/
Banks often bemoan that they are misunderstood and underappreciated. Why such hostility? Sure, they often charge high fees for important everyday services, like using the money you deposited with the bank. And, yes, they lend too much in good times and too little in bad times. And, well, there's the whole wrecking-the-economy-and-then-whining-about-the-burdens-of-regulation thing.
But we're not here to dwell on the negatives about banking. Nooo. Why? Because, looked at from a bank's point of view, the future looks fairly promising, and bank stocks are still a reasonable long-term investment. And if you really hate those fees and all the human misery caused by reckless lending, you can gain a bit of comfort by making some gains in their stocks.
The financial system came within a gnat's eyelash of collapsing in 2008, in large part because of shoddy mortgage lending. And, no, most of those shoddy loans weren't made to satisfy the 1977 Community Reinvestment Act. They were made to satisfy the thirst by borrowers who wanted big houses they couldn't afford. They were also made to satisfy the thirst of unscrupulous loan brokers for commissions, and by the thirst for Wall Street for packages of terrible loans.
After nearly five years of torture for the economy, however, things are looking pretty good for banks. "If you look around, people are buying houses; they're buying cars," says David Ellison, manager of Hennessy Large Cap Financial fund (HLFNX).
Existing home sales, for example, were 10.3% higher in March than a year earlier. And total vehicle sales in April rose 3.5% from a year earlier, for example, and Ford's sales rose 18%. More home sales and more car sales mean more lending, which is a bank's lifeblood.
Furthermore, there's a virtuous cycle in the current spate of mortgage lending, Ellison says. When a home is sold, a borrower is free from what was likely a burdensome loan, and the holder of the note has that potentially bad debt off its balance sheet. The new borrower, who qualifies under sound lending procedures, can afford the house at its current price, and the new lender has a decent asset on its balance sheet.
Furthermore, banks are no longer competing with shyster lenders who offer loans with little or no documentation, as they were during the housing bubble. For banks with good lending practices, it's a healthy and competitive business.
And, while mortgage rates are low, so are deposit rates — which are virtually zero. When interest rates do rise, the spread between deposit rates and loan rates will widen, as deposit rates never rise as quickly as loan rates do. "Banks earn a lot of money when the Federal Reserve is raising interest rates," says Anton Schutz, manager of Burnham Financial Industries fund (BURFX).
Many of the large money-center banks, such as JPMorganChase and Citibank, don't need rising rates. They have a growing market for initial public stock offerings as well as for mergers and acquisitions. And for smaller banks, there's the possibility of being bought out. Larger banks can grow their market share by eating the smaller ones, says Schutz.
Furthermore, many of the largest banks still sell for fairly low prices, relative to earnings. JPMorganChase (JPM), for example, sells for 8.75 times its past 12 months' earnings. Wells Fargo sells for 11.4 times earnings.
(The price-to-earnings ratio — price divided by earnings per share — is an indication of how cheap or expensive a stock is. Lower is cheaper. The Standard and Poor's 500-stock index sells for about 18.5 times its previous 12 months' earnings.)
When looking at a stock with a relatively low valuation, the first question to ask is why. Banks traditionally have lower P-E ratios than the S&P 500, but not by this much. One reason: They really haven't regained their reputation as solid, dependable institutions. (JPMorganChase, for example, recently took a $6 billion loss because of the shenanigans of a rogue trader, dubbed "The London Whale.")
Banks still need to increase their capital — the amount of cushion they have to protect against losses, says Ellison. And they need to get back into the concept of investing in businesses, not simply trading securities. "They got used to making money for no work," Ellison says. "You can't run banks like hedge funds."
At this point, most of the big banks have gone through a cleansing process — aided by taxpayers — and are now in the position of regaining their reputation and repositioning themselves for the future. Ellison says that choosing among the five largest money center banks is like predicting a race as the horses start out of the gate — so he simply owns all of them and intends to monitor them. Schutz likes Texas banks, in part because of the booming oil economy.
The average financial fund is up 28.1% the past 12 months, according to Morningstar, vs. 22.5% for the S&P 500 with dividends reinvested. If you're interested in owning bank stocks, the cheapest way is through an index fund, such as the Financial Select SPDR ETF (XLF) or the iShares Dow Jones U.S. Financial Sector ETF (IYF).
Burnham Financial Fund A, sold through brokers, has beaten 86% of its peers the past five years, although it has lagged this year. Hennessy Large Cap Financial has beaten 83% of its peers over the same time period, Morningstar says.
Bank stocks aren't for everyone. But if you want to recoup a few of those ATM fees — or maybe even some mortgage payments — a bank stock could be one way to get even.
John Waggoner USA TODAY10:06 p.m. EDT May 9, 2013
Article from http://www.usatoday.com/story/money/columnist/waggoner/2013/05/09/bank-stocks-investing-waggoner/2148149/
