Bank of America Corp (BAC), Citigroup Inc. (C): Take the Profits from These Banks to Your Bank

With a 5-year annual earnings growth projection of 10.8% and a current forward P/E ratio of 8.52, Citigroup Inc. (NYSE:C) appears to be well positioned to deliver 10% annualized returns, while patient investors wait for the capital gains to come from an improved price to book ratio.

JPMorgan Chase for solid returns with potential growth

JPMorgan Chase, while not as undervalued to book as the first two banks discussed, is still trading at only 96% of book, leaving room for a 30%-50% capital gain should it rise to a 1.3 to 1.5 multiple. It has a 5-year projected earnings growth rate of 7.1% plus a 2.44% dividend rate, that could realistically produce annualized returns of 9.5% with the potential addition of attractive capital gains, should the price to book value increase to 1.5 times.

This bank is fairly valued today and is poised to deliver steady returns to investors over time, and still retains the potential for excellent capital gains from an increase in the price to book valuation. This bank also holds a fairly low price to cash flow multiple of 7.3 to 1, which is significantly below the industry average of 11.7. This discount of cash flow to the industry would require a 60% increase in the share price of JPMorgan to price it equal with the industry average.

Wells Fargo — a household name endorsed by a household name

Wells Fargo is a household name known around the world. As it happens, another household name Warren Buffett, through Berkshire Hathaway Inc. (NYSE:BRK.A), is the largest shareholder in the bank.

If anyone ever needs a little extra assurance while evaluating a solid, well-run business, seeing Berkshire Hathaway as the largest shareholder should assuage any concerns. While Wells Fargo is more expensive than the other three banks discussed here, it is still priced to deliver reasonable returns. With a projected 5-year earnings growth rate of 10.10% and a dividend yield of 2.67%, this stock could reasonably deliver 12%-13% annualized over the next five years.

A plan for Profit

In the interest of spreading risk, prudent investors may wish to allocate 25% of their capital to the banking sector into each of the bank stocks discussed here; thus taking advantage of the undervalued stocks and adding the security of the larger, more stable ones.

The article Take the Profits from These Banks to Your Bank originally appeared on Fool.com and is written by Ken McGaha.

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