Banks have taken a beating since the collapse of the U.S. housing bubble.
These financial institutions quickly became mere shadows of their past selves as unfettered lending practices, fueled by speculation and out-of-control greed, knocked the once-mighty companies to their knees.
The catalyst was the easy availability of mortgages. No longer did borrowers have to pass rigid standards to qualify for home loans. The banks felt protected on two fronts. First, it was widely believed that the real estate market truly had no upside limit. Second, they could get rid of their risk in the financial markets through newly created instruments called mortgage-backed securities.
The banks thought they had nothing to lose. Greed and competition quickly created an unsustainable situation, and when real estate stopped climbing in value, the entire house of cards collapsed. This resulted in the near-collapse of the entire financial system, requiring the U.S. government to jump in with a bailout.
Now, four years after the worst of the financial crisis, two banks are back in a big way, and it's time to profit again.
Citigroup (NYSE: C): Shares of this banking giant traded as high as a split-adjusted $551 at the peak of the banking bubble in 2007. The bank struggled with profits in 2012 but is making positive changes. Citigroup replaced its CEO last year, and the management team was streamlined.
These efforts have resulted in such an improvement that the bank is planning on buying back more than $1 billion worth of shares. It is projected that Citigroup's earnings will grow 12% annually during the next three to five years. The stock currently trades at 9 times its estimated 2013 earnings of about $4.60 per share. The stock's downside is its dismal dividend yield of just 0.1% or 4 cents per share.
Technically, the daily price chart indicates a double top in the $47 range. A breakout close above $48 should trigger a momentum-based entry. My one-year target price is $57 if the entry is triggered.
Bank of America (NYSE: BAC): This bank has been used and abused for the past several years. But things are finally looking positive, with shares soaring nearly 140% since their $5 lows in December 2011.
Not only was Bank of America hit directly by the financial meltdown, but it purchased the toxic assets of Countrywide Financial, which only added to its woes. Hit with massive legal expenses and a nearly $3 billion fine by the Federal National Mortgage Association (Fannie Mae), this bank appeared to be headed for the world of penny stocks.
However, 2012 earnings were close to three times higher than the previous year's. Shares sell for 12 times predicted 2013 earnings of 99 cents per share, but earnings are expected to grow 19% during the next several years.
Like Citibank, Bank of America yields a dismal 0.3%, making it not the best pick for yield-hungry investors. But with the worst behind it, I project this stock to be trading at $22 within the next 18 months if the buy order is triggered.
Risks to Consider: I am basing my projections on the continued improvement of the U.S. economy. I firmly think the worst is behind us, and things are looking better on a daily basis. However, some economists remain bearish despite the stock market's performance
Action to Take --> I like Citibank and Bank of America as breakout close buy opportunities. Always use stops and position size properly when investing.