Nervous investing experts wait out cheap bank stocks

NEW YORK -- Portfolio manager Eric Boyce of Hester Capital Management talks about great stock-buying opportunities every morning when he meets with his fellow investment professionals in their Austin offices. But they aren't lured by bank stocks, even though once blue-chip institutions, including Citigroup and Bank of America, are trading like penny stocks.

If there's a new wave of credit losses, Boyce says, "The government might take some of these banks over, just like it did Fannie (Mae) and Freddie (Mac)."

Lots of people share Boyce's aversion to banks, even though the sector has fallen 66% over the last 12 months. "Investors are concerned that their shares will be diluted further," says Samuel Hayes, professor of finance emeritus at Harvard Business School.

Several banks hold assets that are made up of complex securities — including home mortgages — that have either plunged in value or are too hard to assess. And the likelihood of additional consumer and commercial loan losses at these severely weakened banks rises as the U.S. recession deepens, putting millions of people out of work.

What's more, the banks cut dividends to a penny per common share when each issued preferred stock to the government for its cash infusions of $45 billion each. The government collects annual dividends of 8% and 10%.

"A classic reason why people invest in bank stocks is for the dividends, and now that's gone," says Cassandra Toroian, chief investment officer at Bell Rock Capital.

Now there's a growing view that federal officials will have to take control of Citi or BofA if either needs additional capital from the government. That could drive the stock price to zero.

One telltale sign is the value that shareholders have put on the banks. Citi has a market capitalization of $18 billion, and BofA's at $30 billion — in both cases, less than the amount of the government's investments.