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It's a good time to invest in U.S. banks

Is this finally the time to be buying U.S. bank stocks?

Is this finally the time to be buying U.S. bank stocks? Many analysts and investors have been jumping on the U.S. financial bandwagon in the last month, driving this sector significantly higher. Investment firms like Goldman Sachs have rated the financial sector, and the banks in particular, with an outperform rating (very positive) for 2011. Personally, I am in total agreement with their recommendation and suggest investors take a look at this sector for their portfolios.

One of the reasons why I believe this sector is so compelling is that it seems like most of the negative news the major U.S. banks had to endure is behind them. There were housing issues, foreclosure/mortgage issues, credit card issues, and stricter (Basil III) guidelines forcing them to keep higher amounts of reserves on their balance sheets.


With all these negative market moving events behind them, banks can move forward and begin increasing their earnings again. J.P. Morgan Chase CEO Jamie Dimon said in a recent interview that his company would have a lot of excess capital he would like to return to shareholders in the form of a dividend. His comments were a lot more upbeat on the economy and the state of his firm, and thus he seemed to feel more comfortable issuing a higher dividend on his company’s shares. Many analysts and investors are now speculating that other banks are in the same shape amd will begin to increase dividends as well. This dividend announcement alone has had a large positive effect on the sector.

Another reason I believe the largest banks in the U.S. are poised to rally is for the simple reason that they are one of only a few sectors not to have participated in the 2010 rally. For the most part, U.S. banks as a group underperformed the broader U.S. market. The sectors leading the rally in 2010 were technology, energy and commodities. Bank stocks, in my opinion, did not participate in the rally due to the negative feelings towards them from the days of the recession in 2008. Thus, I feel that this sector is still cheap and has plenty of room to move higher.

Lastly, something that many investors and analysts are not speaking about is there has been a lot of consolidation in the U.S. financial industry. Some of the largest banks were able to reduce the number of competitors in the industry and make themselves larger through acquisitions in the sector. You had Bank of America buying one of the largest mortgage lenders in Countrywide and one of the best and biggest investments firms in Merrill Lynch. You had J.P. Morgan purchase the largest savings and loan bank in Washington Mutual. They also purchased Bear Stearns. Wells Fargo purchased Wachovia bank, another top 10 (in size) bank. How much will these new acquisitions mean to the bottom line once the economy gets going again? I don’t think anyone will be able to figure that out, however I do believe it will mean much higher profits for those banks that have only gotten stronger during the last recession.

Over the coming weeks and months, I believe investors should begin to look at this forgotten sector for growth in their portfolio. I believe they still represent good value and many will begin paying a dividend again shortly. Investors should always look to “buy low and sell high.” I think this sector gives individuals the chance to do that.

If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you!

Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.

 
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