Tickers in this Article: XLF, IYF, KBE, FII, SCHW, SF, WFC, USB, PNC
If there's one sector that's truly hated by investors, and the general public for that matter, it has to be financial stocks. After all, the real root of the Great Recession and global slowdown can be attributed to all of those bad mortgages and resulting alphabet soup of CDOs. As housing is still struggling and Europe's debt concerns are now back in the forefront, much of that uncertainty still plagues the sector. Overall, financial stocks are still out of public favor and have lagged the two-year old bull market. With so many analysts, pundits and writers continuing to be dour on the sector, it may be time to buy. TUTORIAL: Introduction To Banking And Saving

Improving Fundamentals
Despite the fact that the global economy seems to be getting better, bank stocks have still struggled. Over the last year, they have lagged the broader U.S. market, with the KBW Bank Index having fallen 10%. The S&P 500 is up about 15.6% during that time. Year to date, the S&P 500 financial sector is down 2.7%, making it the worst-performing among the index's 10 sectors. With the economy exhibiting the classic signs of an early-stage recovery, it may be time for investors to consider the sector. Overall, the capital markets seem to be picking up, with credit improving dramatically along with demands for new loans. In addition, problem loans and delinquencies have been falling as the economy continues to improve.

The time may also be right for bank and financial stocks based on metrics. Bank stocks, in particular, are cheap. They trade for just 0.9-times book value per share. The seven year historical average for bank stocks is around two-times book. The popular Financial Select Sector SPDR ETF (NYSE:XLF) can be had for a P/E of just 13, which is still cheaper than the broad market. Analysts at Oppenheimer that have been looking at uncommon metrics such as "total franchise value," "loans plus core deposits" and "total dollar premiums" show that financial stocks are currently trading at only about 44% of their 2000-06 averages. (To learn more, see Book Value: How Reliable Is It For Investors?)

In addition, rising interest rates over the next few years bode well for the financial sector. A bank's net interest margin, which measures the money banks earn by making loans, would increase in that kind of environment. This is due to the fact that a bank can usually raise the rate on their loans faster than they have to raise the rates on their deposits, leading to a greater profit spread. As profits improve, banks are likely to boost their dividend payments. After slashing their dividend payments during the financial crisis to preserve capital, 19 banks have raised their payouts during the second quarter, and 39 did so earlier in the year.

Betting on the Banks
For investors, the financial sector may finally offer some real value. While there are still plenty of concerns, adding a small allocation to the sector may seem prudent given the improving health of the economy. The SPDR KBW Bank ETF (NYSE:KBE) and iShares Dow Jones US Financial Sector ETF (NYSE:IYF) are interesting broad-based choices to add a swath of the sector to a portfolio. But there are good individual choices as well.

Both Federated Investors (NYSE:FII) and Charles Schwab (Nasdaq:SCHW) will benefit from rising rates. Each offers a wide range of money market funds and will be able to recapture fees waived due to rock-bottom interest yields. In addition, Schwab is seeing tremendous growth in its brokerage business as more individuals take control of their finances. (To learn more about the money market, see Getting To Know The Money Market.)

Analysts at both Oppenheimer and Stifel (NYSE:SF) highlight Wells Fargo (NYSE:WFC) as one of the top banking choices for investors. Redeploying just half of the company's $100 billion short-term cash could boost its pretax profits by $880 million a year. The pair also believes that US Bancorp (NYSE:USB) is a great long-term buy based on the bank's growing presence and metrics. USB only trades at forward P/E of just 10 and yields 2%.

Bottom Line
While there is still much to worry about within the global economy, financial stocks are priced to move. Trading at some of their cheapest metrics in years, the sector may offer a value to those investors looking for some risk. The improving U.S. economy, along with rising interest rates, should help companies', like PNC (NYSE:PNC), future prospects.

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