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How to Trade America's Most Hated Stocks

By Frank Curzio, editor, Small Stock Specialist
Monday, December 20, 2010

I've never seen my readers so angry...
About three months ago, I made one of my most controversial stock recommendations: I told my Penny Stock Specialist subscribers to buy banking giant Citigroup under $4 a share.
As I'm sure you know, America's big banks are still some of the most reviled companies in the country. And besides that, Citigroup is far from being a traditional "penny stock." The company's market cap was about $110 billion at the time of my recommendation.
My readers hated the idea. But I believed the unpopular, under-$10 stock had at least 50% upside.
So far, so good. We're about halfway to my target price. Shares are up over 23%. And the trend looks great.
Here's the thing: It was one of the easiest buys I've made all year.
These days, even the best analysts in the world have trouble analyzing bank stocks. Assets are still held "off balance sheet." New regulations are forcing large-cap banks to sell some of their strongest assets. Also, banks are given flexibility in valuing illiquid mortgages due to recent changes in market-to-mark accounting. It's a mess.
But my Citibank recommendation couldn't have been simpler. And it's the safest, best way to trade bank stocks. If you keep this number in mind, it's easy to trade bank stocks for a quick, one-month, 20% gain. And ­– when the time is right – you can double, triple, even quadruple your money in two years or less.
Let me explain...
For Citigroup, I saw that revenue and earnings had trended higher for seven straight quarters. Delinquency rates on loans were declining each passing month. Also, I knew it was a matter of time before the Treasury would sell its full stake in Citigroup. With the Treasury no longer a shareholder, Citigroup could buy back its stock or reinstate its dividend. And institutions would have more confidence buying the stock.
All of these were clear positives. But there was an even bigger reason I recommended subscribers buy Citigroup…
We were buying the bank below its tangible book value.
Tangible assets are cash, inventory, buildings... anything that can be touched. Tangible book value does not include "goodwill" and other assets that are hard to value. Therefore, tangible book value is a more accurate reflection of what a company would sell for if it were liquidated. It's a bargain-basement price.
Right now, the four largest U.S. banks all trade above tangible book value. In fact, JPMorgan and Wells Fargo are at huge premiums to their tangible book value. But Citigroup has a tangible book value of $4.15 a share and a current price of $4.60. The stock could dip back into "crazy cheap" territory. The same is true of Bank of America (BAC)...
BAC shares are trading at $12.52. Its tangible book value is $11.10. So Bank of America is not a buy today. But the large-cap bank fell below its tangible book value about three weeks ago. Take a look...
As you can see from the chart, Bank of America spiked almost immediately after falling below its tangible book value. This is not a coincidence.
In March 2009, Capital One, SunTrust, and Comerica traded below tangible book value for the first time in two decades. Even Goldman Sachs fell below tangible book value in April 2009. These stocks are up 100% to 300% in less than two years.
Tangible book value is one of the best tools I use to analyze banks. You don't often get the chance to buy banking stocks below this level. But – as you can see in the case of Citigroup and Bank of America – this is a great money-making strategy for investing in financials.
Good investing,
Frank Curzio

Further Reading:

Like Citigroup, another one of Frank's favorite stocks has stabilized after getting hammered in 2008. This company lost huge market share to its top competitors...
"Customer service ranked near the bottom of every poll taken," Frank wrote. "In that timeframe, the stock fell from $22 a share to under $2." But he thinks the company could pop 30% from current prices. Learn more here: My Favorite Tech Trade Today.

In The Daily Crux
Market Notes
Euro breaks down to two-week low as Moody's slashes Ireland's credit rating.
Fear index VIX falls to fresh seven-month low… down 66% from May highs.
Junior miner Mirasol Resources rockets more than 75% in a month, even as gold prices decline.
Earnings today... Adobe (software), Darden Restaurants (Olive Garden and Red Lobster).
Market Watch
Symbol Price
S&P 500 1243.91 +0.1% +13.5%
Oil 37.81 +0.1% +4.0%
Gold 134.20 +0.3% +25.0%
Silver 28.51 +0.8% +69.8%
U.S. Dollar 80.02 -0.3% +2.8%
Euro 1.32 -0.4% -8.1%
Volatility 16.11 -7.4% -28.6%
Gold Stocks 556.96 -0.1% +32.4%
10-Year Yield 3.33 -4.3% -4.6%

World ETFs
Symbol Price
USA 124.30 -0.4% +12.8%
Canada 30.38 -0.3% +18.7%
Russia 22.27 +0.3% +22.5%
India 37.26 -0.1% +26.3%
Israel 17.29 -0.1% +15.6%
Japan 10.72 -0.3% +8.4%
Singapore 13.53 +0.3% +17.9%
Taiwan 15.32 +0.5% +24.4%
S. Korea 58.08 -0.1% +26.8%
S. Africa 72.06 -0.2% +28.5%
China 42.59 0.0% +2.0%
Lat.America 52.38 +0.3% +12.0%

Sector ETFs
Symbol Price
Oil Service 136.83 +0.5% +15.9%
Big Pharma 65.30 -0.5% -1.2%
Internet 72.60 -0.5% +30.1%
Semis 16.28 -0.2% +26.8%
Utilities 31.15 -0.7% -1.0%
Defense 18.61 -0.3% +9.2%
Nanotech 10.01 +0.9% +0.6%
Alt. Energy 10.23 -0.1% -4.4%
Water 19.33 -0.3% +15.8%
Insurance 16.21 -1.5% +19.8%
Biotech 21.88 +0.5% +35.5%
Retail 19.47 -1.1% +24.4%
Software 25.41 +0.2% +27.4%
Big Tech 54.52 -0.1% +24.4%
Construction 12.90 -5.9% +9.0%
Media 13.86 -0.1% +20.6%
Consumer Svcs 67.61 +0.1% +22.8%
Financials 56.02 +0.3% +10.5%
Health Care 66.01 +0.1% +4.1%
Industrials 65.11 +0.1% +22.7%
Basic Mat 75.45 +0.7% +29.4%
Real Estate 54.21 +0.8% +19.8%
Transportation 91.40 -0.7% +22.6%
Telecom 23.08 -0.4% +17.8%