Big Banks Bounce Back

Big banks don’t have much of a reputation at the moment. Ok, that’s being
kind. People HATE big banks – or at least they have since the infamous
subprime mortgage loan crisis in late 2008 and early 2009.

More recently, the ongoing global financial crisis has created a whole
lot of fear surrounding big banks, as too many of them have been exposed
to the escalating debt in Greece, Spain, Italy, Ireland and Portugal.

But that’s Europe. Banks here in the U.S. – much maligned the last few
years – are starting to show signs of life. Recently reported
third-quarter earnings at big banks such as JP Morgan
(NYSE: JPM), Bank of
(NYSE: BAC) and Morgan
(NYSE: MS) all beat analyst estimates.
Many of their reported earnings were higher than the same quarter a year
ago. What’s more, most U.S. banks insist that their exposure to the
escalating European debt is minimal.

As a result, bank stocks rose to their highest point in nearly three
months last week, with the KBW Bank
trading at an average of more than $42 at one point last
Thursday. That’s a far cry from the $32.81 the KBW Bank Index opened at
on October 4, albeit still just a third of the nearly $120 average the
bank stock index achieved in 2007. But it’s a start.

Despite last week’s gains, bank stocks remain cheap. Bad publicity left
over from the recession lingers and Occupy Wall Street protesters
continue denouncing bank stocks on the streets of some of the largest
cities in America. It will take some time before bank stocks return to –
or even approach – their pre-recession levels.

Still, for the patient investor, bank stocks appear to be a solid
long-term buy. Many of them are trading at prices well below what their
valuations suggest they should. Most of the big banks boast single-digit
price-to-earnings ratios.

Since bottoming out on October 3, the stock prices for JP Morgan Chase,
Bank of America, Morgan Stanley, Goldman Sachs (NYSE:
and Citigroup (NYSE: C) have all made
steady gains in the market over the past month. All five big bank stocks
had made gains of at least 13 percent since October 3 at the start of
trading today. Morgan Stanley and Citigroup’s stock had risen more than
20 percent. Only JP Morgan failed to outperform the S&P’s 13.7
percent gains over the last four weeks.

The gains made by the big banks bode well for smaller, regional bank
stocks, which you can read more about by subscribing to our High Yield Wealth newsletter.

Despite their recent gains, many bank stocks hit all-time lows on October
3, so they are still cheap – at least by bank stock standards. So while
big banks remain hated among the general public, even as the cries from
the Occupy Wall Street protesters grow louder and louder, bank stocks
appear to be more likable than ever.

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