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The Globe and Mail

Not too late to cash in on U.S. bank stocks

What a tremendous amount of money Canada's banks have made for their shareholders in recent years, shining even as the broader Canadian market stumbled. It's hard to think of a better sector to have bought into in the last couple of years.

Except, um, the United States' banks, which I have consistently and stubbornly recommended, despite reader skepticism.

While Canada's big players rode their track records of safety and healthy dividends to returns of 30 per cent to 40 per cent from mid-2011, U.S. banks have, generally, doubled those marks.

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And here's the best part of the story: You're still not too late, despite those otherworldly returns.

Some examples: Bank of America Corp., which has nearly doubled since June, 2011, when I suggested you should consider getting in behind legendary investor Warren Buffett and his cash infusion into the troubled bank. U.S. Bancorp, up more than 60 per cent since September, 2011, when I suggested its consistent track record and conservative balance sheet would appeal to Canadians hung up on the risks of American banks.

Or Bank of New York Mellon Corp , up nearly 70 per cent since the days in September, 2011, after it suddenly ushered out CEO Robert Kelly.

And JPMorgan Chase & Co., which has gained nearly 70 per cent since I wrote about it during the dark period in June, 2012, after the embarrassing "London Whale" trading fiasco.

(Not all have been home runs. PNC Financial Services Corp. is up just 33 per cent since I recommended it in June, 2011, better than just three of the five biggest Canadian banks. A trio of new bank holding companies assembled to patch up troubled banks averaged a 21 per cent return since September, 2012, slightly behind the typical Canadian-bank return for the period.)

But when your losers are the ones that gained only 20 per cent, it's almost been a case of "pick a bank, any bank." In October, 2011, I noted many U.S. banks were sliding back to their low valuations of March, 2009. "Time to withdraw those 'buy' calls? Time to say the only way to make money in financial stocks is to invest in Canada's more robust banking sector? No. It's time to say strong-stomached investors should buy in to the sector now, so long as you have the patience to hold on for a year or more."

Since that day, the exchange-traded fund that tracks the S&P Banks Select Industry Index is up 80 per cent. The ETF that dips into smaller regional-bank names for its membership is up 93 per cent.

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So, what was that part about not being too late? Well, here's the idea: Despite their shooting share prices, many banks' valuations haven't risen remarkably.

U.S. Bancorp traded at a high of 2.6 times its tangible book value in the fourth quarter of 2011; that measure is 2.8 today. Its forward price-to-earnings ratio has inched up from 10.6 to 12.6. JPMorgan Chase? Price-to-book has gone from 1.2 to 1.4, and forward P/E from 8.1 to 9.6.

You see, even as the "P" for "price" in these ratios has jumped, so, nearly as much, have the underlying measures of quality. That's kept U.S. banks' valuations in check despite the returns outlined above.

Put together a list of North American banks with a market capitalization of $5-billion or more. In that price-to-book measure, Canadian banks take five of the six spots at the most-expensive part of the list. Bank of Montreal is the cheapest at two times book; 13 American banks are cheaper, including Wells Fargo & Co. Inc., JPMorgan, Bank of America and Citigroup.

Disclosure: I wish I had taken more of my advice. I own seven U.S. banks, including Wells Fargo and PNC, and the bank ETF, but many were purchased either before the financial crisis or earlier this year. But, to illustrate how it seems never to be too late to buy U.S. banks, the ETF has returned 20 per cent since its March purchase.

In the coming months and years, we presume, interest rates will rise to still-low but more-normal levels, which will goose profits at the U.S. institutions. If so, I'll be able to write another column about what a great idea it is to buy U.S. banks on the upswing.

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Additional disclosure: As a freelance journalist, the author has received payment writing for Wells Fargo's publications for clients.

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