Breaking Down the Banks – Should You Buy Now?

It has been nearly three years since the Lehman Brothers bankruptcy, and every few months I get a flood of emails asking if it’s time to get back into banks and the financial sector. Just this week, one of my Facebook members asked, “What do you think about Bank of America (NYSE: BAC ) stock? Is any chance that we can see $11.90 or $12.80 by the end of July?”

I understand the urge to get back into a sector and recoup losses — and the current dangers of the financial sector. Investors have been hurt by a number of false rallies in banking stocks over the last three years and I don’t want that to happen to Lepi or any of my readers, so we’ll dive into three distinct areas of financials and see if there are any safe ways to invest.

Let’s start with Bank of America stock and some of the other major diversified financial companies. These companies aren’t just banks because they are involved in just about every aspect of the financial sector. The key here is that it isn’t just about getting people to open savings accounts.

Bank of America (NYSE:BAC) is not safe to invest in right now. Before I make a single stock recommendation I put the stock through rigorous fundamental screens to make sure it has a solid foundation that protects it from market volatility. BAC fails in nearly every category. The company is not growing its sales, earnings or margins and that’s why the stock has been through volatile fits and starts as investors rush in and out on speculation and not actual growth. Plus, these types of financial companies still can’t get their act together when it comes to ethical business practices. Allegations about one of BAC’s units committing fraud and charging unfair fees in 2002 are coming to light. Sorry Lepi, but it BAC has a better chance of breaking under $10 than breaking over $12 right now.

Citigroup (NYSE: C ) is another diversified financial company that doesn’t get quite as bad of marks as BAC, but still is a stock to avoid. Citigroup has been able to get operating margins and cash flow moving in the right direction, but is still lacking the earnings growth and other fundamentals that will keep the stock on an upward trajectory. Plus, Citigroup isn’t out of the woods when it comes to scandals. Following a hacker attack that stole data on hundreds of thousands of credit cards, this week a Citigroup accountant faced charges of stealing $19.2 million from the company. Until Citigroup can make the headlines because of positive developments in the company, avoid this one as well.

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Kiplinger's Personal Finance

Kiplinger's Personal Finance