Dear Mr. Market:

A part of us cringes as we succumb to the pressure of having to write about the most recent worrisome headline. Why? It’s sort of like the Kardashians or trashy television personalities in general; the more you talk about it the more it gives some the perception that it’s worth talking about. Now, don’t get us wrong….theses recent headlines aren’t a cause for celebration by any means either but if it’s prompting you to cash out of the market, board up your windows, buy ammo, grow vegetables, or raise chickens in the backyard, you’re repeating an age old mistake. But… “the sky is falling” and “it’s different this time”, right? Not really, but rather it’s once again time to put things in perspective, look at data instead of narrative, facts over fear, and who knows…possibly find opportunities?!

We won’t get deep in the weeds in each company but along with a quick background of what’s going on, we want to look at the top five largest banking stocks and actually suggest thinking about a time when you may want to buy them! We’re not market timers but whenever there is a lot of pressure in one area of the market or a certain sector of the economy, it’s worth assessing if it’s truly the end of the world or not. Recall a time not too long ago (3 years almost to the day) when instead of jumping off the ledge due to oil stocks getting slaughtered, we did something different; we reviewed which ones we thought might be worth buying. Click here to see the article from March of 2020 when we covered Conoco Phillips (COP), Chevron (CVX), Exxon Mobil (XOM) and Occidental Petroleum (OXY). Not that we suggested backing up the truck with your entire portfolio to buy each of them, had you done that on 3/28/20 when we wrote the article, you would have returns of 222%, 121%, 170%, and 403% respectively! How did the S&P do over that exact same stretch? Up +55%….so basically a fraction of the oil sector returns and opposite of the average investor’s overreaction at the time. (Incidentally, these oil stocks are all down YTD so humans with short memories don’t want them anymore, right?). Wash, rinse, repeat…

Does that little preamble mean banking stocks now will be the oil stocks from just three years ago? …Maybe not, however, wherever there is a seller there is a buyer and we can assure you that the top largest banks in the US will be around in three years and trading much higher than these levels. Before we dive into each and essentially “time stamp” yet another investing idea…let’s quickly put the current situation into proper perspective.

First and foremost, let’s start by clearly writing out which banks collapsed and wreaked havoc; Silicon Valley Bank (SIVB) and then Signature Bank (another regional bank)…operative word…regional…failed. We’ve personally spoken to several experienced bankers who have told us that in their professional opinion this is not a 2008 Lehman Brothers type event nor the start of some wildfire. Although these two banks basically brought down the markets all week and especially banking stocks, they are not representative at all of most regional banks to begin with. As we publish this article on Friday, one banker shared an industry saying that actually has some merit behind it, “Banks fail on Fridays”, and that’s essentially because it allows the government to fix up the mess over the weekend!

Secondly, part of these bank failures is an economics issue and not necessarily pure tech exposure or nefarious crypto dealings. We actually think there is a possible silver lining in all this mess since the Fed raised rates so darn aggressively trying to beat down inflation, they are hopefully now seeing that perhaps it’s time to slow down before completely breaking the system.

Third, don’t be too quick to connect dots on news that Credit Suisse (overseas) is the next domino to fall and we now begin the contagion globally. Credit Suisse has been in trouble for quite some time and five months ago was thought to trigger a global credit freeze. Remember that the “too big to fail” motive is very much in play and there is no way central banks would let financial stability get decimated as it did during the Financial Crisis. In a sense, the banking rule book is gone now (not that it’s a good thing but simply a reality). Additionally, with governments willing to step in no matter what …it causes a moral hazard of sorts essentially encouraging future bad behavior or risk practices. Opine as you may, to this end we’re not fans of bailouts but understand what could happen and how things could escalate had a backstop not been put in.

Our current premise is that these bank failures have caused and will continue to encourage customers to set up new banking relationships and move funds into larger (presumably safer,  too-big-to-fail type) banks. Don’t confuse us pounding the table that bank stocks are cheap and that’s why you should buy them because they can get cheaper if you catch our drift. Long story short…it’s perhaps a touch early, but just like all boats rise and lower with the tide, we think the following five largest US banks will eventually be bargains. Before we touch on each stock let’s preface this to avoid anyone getting triggered by these names. (they’re not in the order of our favorites but rather by size!) :

JP Morgan Chase (JPM)

Currently trading at $125.81, $3.2 trillion in assets, P/E ratio of 10.20, and dividend yield of 3.12%. Down -9.10% past 12 months.

12 month price target of $156 (approximately +23% from current levels)

Of the bunch this is perhaps the safest bet (but maybe not the best for upside). They’re considered “best in class” of the large banks and should weather the storm better than most in the group. Expect a strong back half of 2023 for JPM. JPMorgan has significant liquidity, with its cash and equivalents adding up to $540.5B which is why CEO Jamie Dimon and his crew are highly regarded in banking, with a relatively low risk of failure.

Bank of America (BAC)

Currently trading at $27.82, $2.41 trillion in assets, P/E ratio of 8.59, and dividend yield of 3.09%. Down -32.31% past 12 months.

12 month price target of $43 (approximately +54% from current levels)

B of A has possibly the highest upside of the bunch. They are rumored to possibly be buying Signature Bank but of course by the time we write this it could all be hype or falsely spreading. The point is though, with smaller banks struggling this is a perfect example of who might swoop in and be a benefactor. This stock hasn’t traded at these levels since the Covid lows. Of course the stock could face more downside risk as the market is still on edge, but they’ve grown their deposit base and will benefit from the crisis and the flight to safety in the banking sector.

Citigroup (C)

Currently trading at $44.25, $1.77 trillion in assets, P/E ratio of 6.11, and dividend yield of 4.55%. Down -19.68% past 12 months.

12 month price target of $53 (approximately +19% from current levels)

Citigroup was one of the first banks reporting this week massive volume and were basically inundated with deposits after they fled from other smaller regional banks. Citigroup is trading near its lowest valuation in 10 years and like most well run banks will benefit from rising interest rates. This is possibly the best value in the group not to mention a price to trailing cash flow multiple of 4.1 times which is almost 25% lower than their peers who are making the same types of loans and holding similar balance sheets. 

Wells Fargo (WFC)

Currently trading at $37.76, $1.72 trillion in assets, P/E ratio of 11.87, and dividend yield of 3.09%. Down -23.84% past 12 months.

12 month price target of $50 (approximately +32% from current levels)

It’s hard to hold back our distaste for this company. Yes, they’ve spent a ton of PR campaigning to rebuild their image but honestly why would anyone want to do business here? Maybe it’s the traditional bank formula of having “sticky money” where it’s a pain in the butt to leave a bank when you have your mortgage there, checking, utility bills on auto pay etc., but after the second or third breach of consumer confidence (opening fake accounts), we would just take this off the list for that reason alone. Sorry!

U.S. Bancorp (USB)

Currently trading at $32.95, $585 billion in assets, P/E ratio of 9.44, and dividend yield of 5.12%. Down -35.39% past 12 months.

12 month price target of $50 (approximately +51% from current levels)

They’ve been absolutely drilled the past week or so (down -18% over five days and -25% the past month). US Bancorp had a rough 4th quarter but will recover. Just this past December they closed their acquisition of Union Bank and are expanding with a healthy presence on the West Coast now. Watch this bank with a more conservative risk profile pay off for investors but it may take a little longer than the rest.

Over the short-term volatility will persist. Remember our oil article and the mindset you were in at that time. It probably would’ve been hard to pull the trigger on buying an oil stock at that moment. Most banks are in excellent shape so try not to correlate some that got over their skis or took on risks they shouldn’t have because there are others who don’t operate like this. The banking system also has ample liquidity. Like them as a consumer or not, the banks we name in this article will likely win out once the dust settles and we move on to the next train wreck, reality TV show, or fearful narrative. Take a deep breath, begin putting your shopping list together, and get ready to add some of these names to your portfolio.