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What’s in Your Portfolio?

Consider big banks. Despite strong gains, the stocks still offer plenty of opportunity.

BY KATHY KRISTOF

COURTESY CAPITAL ONE

BANKING’S BEHEMOTHS ARE on a roll. Big-bank stocks have soared over the past two years, and the companies’ prospects look bright, thanks to an uptick in business lending, better loan quality and cleaner balance sheets. “The broad economy is improving, and a big part of a bank’s success is tied to the health of its markets,” says analyst Joe Morford, with RBC Capital Markets.

To be sure, the stocks are still well below where they were before the financial crisis struck five years ago. For example, CITIGROUP (SYMBOL C) sold for as much as $552 in 2007 (adjusted for a reverse split in 2011). Today, the stock goes for $43 (share prices are as of April 5).

Citi may be the most promising of the big-bank stocks, says Raymond James analyst Anthony Polini. The company rejiggered its management team in late 2012. CEO Michael Corbat takes every opportunity to stress that the bank is leaner and more focused on cutting costs and managing risks than ever, and that it is nothing like the company that posted massive losses a few years ago.

Analysts expect Citi’s earnings to grow about 12% annually over the next three to five years. The profit growth should boost the stock, which trades at 9 times estimated 2013 earnings. Polini expects Citi to hit $52 within a year.

The hottest big-bank stock has been BANK OF AMERICA (BAC). Its shares have rocketed from $5 in late 2011 to $12 today. BofA is slowly working through the disastrous results of a decade of acquisitions, which culminated in the 2008 purchase of Countrywide Financial. The deal put BofA on the wrong end of massive loan losses and a seemingly endless stream of litigation filed by everyone from shareholders to the Justice Department. Strong results and the belief that BofA’s woes are finally winding down have driven the stock’s ascent. The shares sell for 12 times predicted 2013 earnings. That seems expensive for a bank stock, but it looks like a fair price in light of expected annual earnings growth of 22% over the next few years. Morford sees the stock hitting $14 within a year.

Shares of JPMORGAN CHASE (JPM) continue to be held back by a London trading debacle that cost the bank a whopping $6.2 billion, says analyst Erik Oja, of S&P Capital IQ. Although a congressional report was highly critical of the company’s leadership, including chairman and CEO Jamie Dimon, Oja thinks JPMorgan is among the nation’s best-run banks. At $48, the stock sells for nearly 9 times estimated 2013 earnings and yields 3.2%. Oja’s 12-month target price is $55.

An attractive big bank with a different focus is CAPITAL ONE FINANCIAL (COF). One of the nation’s biggest credit card issuers, Capital One may be best known for its tongue-in-cheek ads featuring Alec Baldwin (pictured) and basketball legend Charles Barkley. A string of acquisitions has turned Capital One into one of the nation’s largest banks by deposits, but its market capitalization of $32 billion is only one-fourth that of Citi and BofA.

Capital One focuses more on consumers and less on businesses than the other banking behemoths. It generates about three-fourths of its income from credit cards and consumer loans. The improving financial health of the consumer sector is driving down Capital One’s default rates and helping to put the company in a position to meet increasingly stringent regulatory capital requirements well ahead of schedule.

In fact, the bank is so well capitalized that regulators recently gave it permission to hike its quarterly dividend sixfold, to 30 cents per share. At $55, the stock yields 2.2% and sells for 9 times projected 2013 earnings. RBC analysts believe the shares will reach $67 over the coming year.

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