5 Most Undervalued Bank Stocks To Buy According To Hedge Funds

In this article, we discuss 5 most undervalued bank stocks to buy according to hedge funds. If you want to see more stocks in this selection, check out 11 Most Undervalued Bank Stocks To Buy According To Hedge Funds. 

5. KeyCorp (NYSE:KEY)

Number of Hedge Fund Holders: 33

P/E Ratio as of January 20: 7.55

KeyCorp (NYSE:KEY) was founded in 1849 and is headquartered in Cleveland, Ohio. It is the holding company for KeyBank National Association, which provides retail and commercial banking products and services in the United States. KeyCorp (NYSE:KEY) operates in two segments – Consumer Bank and Commercial Bank. It is one of the most undervalued stocks in the banking sector. 

On January 19, KeyCorp (NYSE:KEY) reported a Q4 GAAP EPS of $0.38 and a revenue of $1.89 billion, falling short of Wall Street estimates by $0.16 and $40 million, respectively. The provision for credit losses of $265 million exceeded net charge-offs by $224 million. 

Deutsche Bank analyst Matt O’Connor on January 6 reiterated a Hold rating on KeyCorp (NYSE:KEY) and lowered the firm’s price target on the shares to $20 from $23. The analyst believes new lows seem possible for U.S. bank stocks. He assumes bank stocks will trade below their historical 60%-80% range, noting bank earnings may be peaking. 

According to Insider Monkey’s data, KeyCorp (NYSE:KEY) was part of 33 hedge fund portfolios at the end of September 2022, compared to 37 in the prior quarter. Phill Gross and Robert Atchinson’s Adage Capital Management is the biggest stakeholder of the company, with 6.30 million shares worth $101 million. 

4. Comerica Incorporated (NYSE:CMA)

Number of Hedge Fund Holders: 45

P/E Ratio as of January 20: 9.24

Comerica Incorporated (NYSE:CMA) is a Texas-based company that provides various financial products and services. It operates through Commercial Bank, Retail Bank, Wealth Management, and Finance segments. Comerica Incorporated (NYSE:CMA) on January 19 reported a Q4 GAAP EPS of $2.58 and a revenue of $1.02 billion, outperforming Wall Street estimates by $0.03 and $10 million, respectively. The loans increased by $1.3 billion to $52.4 billion in the fourth quarter of 2022. It is one of the most undervalued bank stocks to invest in. 

On January 20, DA Davidson analyst Peter Winter raised the price target on Comerica Incorporated (NYSE:CMA) to $82 and maintained a Buy rating after the company’s Q4 earnings beat. He believes the stock’s forward earnings multiple assumption of 8.3-times is conservative and Comerica Incorporated (NYSE:CMA)’s long track record of best-in-class credit metrics should be positive for the company if the US economy enters a recession this year.

According to Insider Monkey’s Q3 data, 45 hedge funds were long Comerica Incorporated (NYSE:CMA), up from 38 funds in the prior quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP is the leading position holder in the company, with 2.3 million shares worth $169 million. 

3. Citigroup Inc. (NYSE:C)

Number of Hedge Fund Holders: 85

P/E Ratio as of January 20: 6.94

Citigroup Inc. (NYSE:C) is an American multinational investment bank and financial services corporation that serves individuals, corporations, governments, and institutions in North America, Latin America, Asia, Europe, the Middle East, and Africa. Citigroup Inc. (NYSE:C) is one of the most undervalued stocks to buy according to hedge funds. 

On January 13, Citigroup Inc. (NYSE:C) reported Q4 non-GAAP earnings per share of $1.10, missing market estimates by $0.10. The revenue came in at $18 billion, topping Wall Street consensus by $30 million. Citigroup Inc. (NYSE:C) declared on January 12 a $0.51 per share quarterly dividend, in line with previous. The dividend is distributable on February 24, to shareholders of record on February 6. 

BofA analyst Ebrahim Poonawala on January 17 raised the price target for Citigroup Inc. (NYSE:C) to $60 from $52 and maintained a Buy rating on the shares. He praised management for navigating a period of extraordinary volatility while building capital, executing on consumer business exits, and mostly staying on track with executing on its strategic plan laid out last February. The analyst also sees potential catalysts, such as the sale of its Mexico retail bank Banamex and an event-free 2023 CCAR stress test, that could reinvigorate interest in the stock.

According to Insider Monkey’s data, Warren Buffett’s Berkshire Hathaway held the largest stake in Citigroup Inc. (NYSE:C) as of the end of September 2022, with more than 55 million shares worth $2.3 billion. 

In its Q1 2022 investor letter, Diamond Hill Capital, an asset management firm, highlighted a few stocks and Citigroup Inc. (NYSE:C) was one of them. Here is what the fund said:

“Shares of Citigroup Inc. (NYSE:C) declined in the quarter as investors became increasingly negative on capital markets activity. The company is also continuing to divest certain consumer banking geographies which may be dilutive to earnings in the near term.”

2. Bank of America Corporation (NYSE:BAC)

Number of Hedge Fund Holders: 97

P/E Ratio as of January 20: 10.42

Bank of America Corporation (NYSE:BAC) is an American multinational investment bank and financial services holding company that caters to individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide. Bank of America Corporation (NYSE:BAC) is one of the most undervalued bank stocks to invest in according to elite hedge funds. 

On January 13, Bank of America Corporation (NYSE:BAC) reported Q4 GAAP earnings per share of $0.85 and a revenue of $24.53 billion, outperforming Wall Street estimates by $0.08 and $360 million, respectively. Net interest income increased by $3.3 billion, or 29%, to $14.7 billion, supported by higher interest rates, lower premium amortization expense, and solid loan growth.

Citi analyst Keith Horowitz on January 17 raised the price target on Bank of America Corporation (NYSE:BAC) to $38 and maintained a Neutral rating on the shares. He was surprised to see the stock outperform on the earnings report despite negative sentiment heading into the Q4 season and the downside to the EPS consensus revisions. 

According to Insider Monkey’s third quarter database, 97 hedge funds were long Bank of America Corporation (NYSE:BAC), compared to 99 funds in the earlier quarter. Harris Associates is a prominent stakeholder of the company, with 41.8 million shares worth $1.26 billion. 

Ariel Investment made the following comment about Bank of America Corporation (NYSE:BAC) in its Q3 2022 investor letter:

“We initiated three new positions in the quarter. We added leading financial institution Bank of America Corporation (NYSE:BAC) which serves individual consumers, small and middle-market businesses, and large corporations with a full range of banking, investing, asset management, and other financial and risk management products and services. The current company was formed through various mergers including NationsBank, FleetBoston, US Trust, Countrywide Financial, and Merrill Lynch with the legacy commercial bank to form a national banking powerhouse and bulge bracket investment firm. As one of the ‘Big Four’ U.S. banks it enjoys scale driven cost advantages and economies of scale which provide meaningful competitive advantages and potential for strong returns in the largely commoditized banking industry. A survivor of the financial crisis, BAC has emerged with a solid capital base and stands to benefit from a rising interest rate environment.”

1. JPMorgan Chase & Co. (NYSE:JPM)

Number of Hedge Fund Holders: 110

P/E Ratio as of January 20: 11.15

JPMorgan Chase & Co. (NYSE:JPM) is a financial services company that operates through four segments – Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management. On January 13, JPMorgan Chase & Co. (NYSE:JPM) announced that it expects to resume stock buybacks this quarter and called $12 billion a “good number” for stock repurchases in 2023. JPMorgan Chase & Co. (NYSE:JPM) is one of the most undervalued bank stocks to monitor. 

On January 17, Citi analyst Keith Horowitz raised the firm’s price target on JPMorgan Chase & Co. (NYSE:JPM) to $165 from $150 and reiterated a Buy rating on the shares. The company’s updated guidance and latest earnings commentary helped alleviate the analyst’s concerns on expenses and capital. The analyst sees upward revisions to consensus estimates.

According to Insider Monkey’s Q3 data, 110 hedge funds were bullish on JPMorgan Chase & Co. (NYSE:JPM), compared to 104 funds in the prior quarter. Peter Rathjens, Bruce Clarke, and John Campbell’s Arrowstreet Capital is a significant position holder in the company, with 7.5 million shares worth $788 million. 

Here is what Vltava Fund has to say about JPMorgan Chase & Co. (NYSE:JPM) in its Q3 2022 investor letter:

“We regard JPM to be the strongest and best- managed bank in the world. It is a leader in investment banking, commercial banking, credit cards, and asset management. Its size (the largest bank in the USA, with nearly USD 4,000 billion in assets) and diversification give it a strong competitive advantage that is compounded by its cost advantages and the high costs to clients associated with switching banks. JPM’s management prides itself on running the only large bank to avoid major instability over the long term.

JP Morgan’s quality and strength first became fully evident in 2008 under the leadership of its CEO Jamie Dimon. Not only did JP Morgan help to stabilize the market by taking over the failing Bear Stearns in the spring of that year, but throughout the Great Financial Crisis it was the only big US bank that did not require government assistance and it was highly profitable even in the difficult year of 2008.

A well-functioning and efficient bank can be a very good long-term investment, because the interest compounding effect works well here. JPM’s return on equity (ROE) is well into the double digits and this puts it in a good position to continue producing better long-term returns than does the market. JPM has been very profitable even during years when interest rates were close to zero. The current – and perhaps not temporary – return to somewhat more normal, higher interest rates should have a significantly positive impact on the bank’s interest income and overall profitability.”

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