Why Bank Stocks Are Ready to Soar
By Dr. Steve Sjuggerud
October 26, 2007

In yesterday's DailyWealth, I described what is close to "Holy Grail" investing... an opportunity to make hundreds of percent gains, with little downside risk.

That opportunity exists now in supercheap regional banks... the financial businesses that make simple, safe loans.

For a frame of reference on how cheap regional banks are, let's look at the recent history of our example, Synovus...

Synovus' dividend hasn't been as high as it is now since 1983 (except for a short period in 2003). And on a price-to-earnings basis, Synovus hasn't been this cheap since 1991.

These dates (1983 and 1991) are important...

If you'd bought Synovus on January 1, 1983, and reinvested your dividends, you'd have made more than 500% returns in just three and a half years.

Fed Saves Housing, Bank Stocks Soar, Act I

And as our next chart shows, if you'd bought Synovus on January 1, 1991, and reinvested your dividends, you'd have a triple-digit return in a little more than two years.

Fed Saves Housing, Bank Stocks Soar, Act II

Around these dates, bank stocks in general soared, and Synovus outperformed the big banks. There's a good reason why the stocks did well around these dates: The Fed was cutting interest rates, pulling the country up out of a recession.

These times – 1980-82 and 1990-91 – were the worst the U.S. economy has seen since we went off the gold standard. I'd argue that times today are not nearly as bad as they were then... yet shares of regional bank stocks, like Synovus, are cheaper right now than they were in those crises.

For example, in the early 1980s, mortgage rates peaked at 20%, and unemployment peaked at near 10% – the highest since the Great Depression. Even if you had a job, you still couldn't afford your mortgage payments!

Today is not even close to as bad as the early 1980s. Mortgage rates today are below 7%, and unemployment is at 4.6%. Times were much worse in the early 1980s, but shares of Synovus are just as cheap today as they were in that crisis.

Back then, in 1983, was the last time Synovus' dividend was solidly above 3%. Remember, you'd have made 500% if you'd bought back then.

Now I'm sure you're thinking... "Steve, what about the housing situation... How can banks make any money if nobody wants a mortgage?"

Well the evidence supports the case for regional banks...

In the last 40 years, new home prices have endured only three sustained falls. The three peak-to-trough falls were: summer of '79 to summer of '82, summer of '89 to summer of '92, and summer of 2005 until... if history repeats... the summer of 2008.

In each case, new home prices fell by roughly 15%, adjusted for inflation. This time around, home prices are down almost that much. It's possible there's not much farther to go... New home prices might bottom in the summer of 2008, and the government is already cutting interest rates.

However, for us to make the biggest profits, we need to buy the shares of regional banks before home prices bottom, as new home prices lag stock prices.

To sum up, the reasons to buy small banks are almost too numerous to go through individually...

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Good investing,

Steve