Prudent Banking Bets

02/23/2016 7:00 am EST

Focus: STOCKS

John Buckingham

Editor, The Prudent Speculator

Value investing expert John Buckingham focuses on building a diversified portfolio of fundamentally strong stocks for long-term investors; here, the editor of The Prudent Speculator highlights two bank sector buys.

Capital One Financial (COF)

Capital One is a diversified financial services company involved in the full spectrum of domestic and international credit card, auto, consumer, and small business lending.

Diversification into regional banking has benefited COF, reducing credit card lending cyclicality and adding stability to returns.

Despite expectation-beating 4th quarter results, COF shares remain off more than 30% since last summer, which has made the valuation even more attractive with the shares currently trading at less than nine times next-12-month earnings projections.

We also like that the firm is in the midst of restructuring to improve cost management and overall operating efficiency.

COF’s strong brand and calculated customer targeting has resulted in stronger credit quality and below-average charge-offs, compared with many other credit card issuers.

Additionally, we think that the company’s purchase of GE’s healthcare financing unit will prove beneficial.

We see nice upside potential due to improving top-line growth and a healthy overall credit profile. COF yields 2.4%.

Wells Fargo (WFC)

Wells Fargo, with $1.8 trillion in assets, serves one in three US households and offers a wide array of financial products ranging from banking, investments, and insurance to mortgages and commercial finance.

Headwinds from the low-interest-rate environment and increased regulatory costs have hurt, but Wells’ unique business model has aided results, including recently announced expectation-beating 4th quarter EPS.

WFC realized a 6% increase in bank assets as a growing customer base, loan and deposit growth, and improving credit quality continued to bolster performance.

Furthermore, on its earnings call, management said the firm’s energy loan portfolio currently accounts for less than 2% of total loans.

We like that WFC has a solid reputation with its customers and a strong and growing foothold in metro America and the heavily populated coastal regions.

Wells Fargo has good capital ratios and liquidity, and appealing core earnings power. WFC trades for less than 12 times forward earnings estimates and yields 3%.

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