Investing in bank stocks at the height of the financial crisis was a very risky endeavor. But those who braved the market and bought bank stocks did very well for themselves, making several times their money in just a few months.
Bank stocks are again taking a beating amid the sovereign debt crisis in Europe. While they haven’t collapsed, they are down considerably from their yearly highs. Richard X. Bove, the outspoken banking analyst at Rochdale Securities, has argued for months that the big banks are undervalued. He believes that this latest hit to bank valuations has created a buying opportunity.
“There is a panic in the markets at present,” Mr. Bove wrote in a note to clients on Tuesday. “This is creating solid buys in bank stocks.”
Instead of simply arguing why certain bank stocks were undervalued, as he has done in the past, Mr. Bove quantified his view with a thorough analysis of bank data stretching back to the 1990s. He found that there were few metrics that actually shed light on his assertion, given the volatile markets of the last 20 years in bank investing.
“The hope was to find a common set of metrics on which to value these companies,” Mr. Bove said. “Unfortunately, the data reveals that there is no magic formula.”
Nevertheless, Mr. Bove said he found at least one metric that seems to be the best predictor of bank value: the index of nonperforming assets, which measures the quality of loans on a bank’s book. As loan quality deteriorates and the number of charge-offs increase, bank stocks take a dive. This variable seems to be more important than earnings or interest rates in driving stock prices....MORE