Bank-Stock Comeback: Three Trading At-or-Below Book Value With Earnings Momentum

Take it to the bank. Maybe it�s no longer a joke for investors. Using comparable ETFs as proxies, financial stocks jumped to a better start to 2012 than the broad S&P 500 index and even the popular S&P 600 index of small-company stocks:

Financial Select Sector SPDR Stock Chart by YCharts

Switching the percentage change comparison to a 5-year view from a year-to-date view shows how much ground financials have to make up since the financial crisis erupted:

Financial Select Sector SPDR Stock Chart by YCharts

Bank stocks such as Bank of America (BAC) have hir hard times. Bank of America�s market cap, for instance, is less than the value of the cash on its balance sheets.

Bank of America Corporation Cash and ST Investments Chart by YCharts

But the Financial Times reported that financial stocks are trading above the book value (assets, including cash, minus liabilities) of the companies for the first time since July. These metrics suggest that bank stocks have moved beyond last summer�s onset of a European financial calamity and even the prospect of stiffer legal and regulatory attacks on the U.S. banking industry stemming from abusive mortgage lending.

Banks stocks trading for less than tangible book value or the value of cash on their balance sheet look like bargains, assuming that the negative factors that reduced the price/book value ratio are at least not getting worse. Such hopes underlie the rally, even as the European financial crisis simmers, the U.S. economic recovery remains tentative and U.S. prosecutors and regulators say they are far from the end of punishing the industry for its sins.

For now, among the top four banks � JPMorgan Chase (JPM), Bank of America, Citigroup (C) and Wells Fargo (WFC) � only Wells Fargo is trading above book value.

Bank of America Corporation Price / Book Value Chart by YCharts

But the current resurgence of optimism about bank stocks, amid modest good news about the U.S. economy, makes it worthwhile to look for bargains rather than run away in terror from the sector. The screening process involves finding banks still priced below book value that have reasonable stories of earnings growth and dividend stability. Here�s a sample, focusing on regional banks:

Pittsburgh, Pa.-based PNC Financial Services Group (PNC), one of the large banking firms that weathered the last five years relatively well, trades at just under a 1.00 price/book ratio. The reasonable 2.3% dividend yield reflects an increase in the quarterly payout last summer to 35 cents a share from 10 cents.