These 3 Bank Stocks Just Got "Perfect Grades" After the Fed's Last Hike

Fear not, the U.S. Federal Reserve knows all.

bank stocksWhen it comes to interest rates and the state of the economy, there is no better source of information.

When I began my career in the securities business in the late 1980's, the brightest candidates migrated to the bond side of the business.

Wanting to be considered the best and the brightest, I naturally took my first job calculating bond yields and arbitrage rebates (don't ask) for municipal securities underwritten by the largest investment banks in the country.

Since that time, I've always stated that the bond market knew all... way more than those in the stock market. That is, until now. In fact, the bond market is lost at the moment.

Interest rates on the long end of the curve are plummeting, ever since the central bank disappointed the market with a rate hike and hawkish statement for 2019.

These plunges in rates come despite a few key inconvenient facts that irrational bond market participants ignore.

For starters, economic data is robust and will be for some time.

Yields on the long end are falling as participants bet on negative gross domestic product (GDP) at some point in the near future.

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That's not happening.

You don't go from 3% GDP to negative GDP in a quarter or two.

The U.S. economy is like the titanic right now. It will take some time turning negative if indeed it goes negative at all.

The Federal Reserve knows this and smartly did not adjust its strategy with respect to short-term rates.

Ultimately, the bond market will result in long-term rates going higher from here.

Another important clue to how the bond market has things entirely wrong relates to the central bank reducing the size of its balance sheet.

No longer is the Federal Reserve out buying securities. And the absence of that buying power is hugely bearish for bonds.

Rates are going higher. So how do we prepare for that as investors?

More importantly, what do we buy to make the most money in our portfolios right now?

One of the best things to buy in a period of rising rates is bank stocks.

And naturally, the Money Morning Stock VQScore™ system is confirming this thesis.

This week, three banking stocks just received our highest VQScore for the first time.

Here are the three best bank stocks to buy today...

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The 3 Best Bank Stocks to Buy in 2019

The first pick on our list is Cullen/Frost Bankers Inc. (NYSE: CFR).

This regional bank operating in Texas has been hit hard by the collapse in oil prices.

Shares are down approximately 25% from their peak last spring 2018.

While painful, Cullen/Frost has held up well compared to the gigantic, Wall Street banks like Citigroup.

If the bond market has it wrong on the yield curve, investors have it wrong on Cullen/Frost.

The company is trading for only 13 times 2018 earnings, earnings that are expected to actually grow in 2019. Right now, analysts project CFR's earnings will climb 25% in 2019.

Unlike many companies in the market whose earnings are slipping, Cullen/Frost is poised for growth.

That growth will be even more substantial when rates continue their ascent in 2019.

Add in a dividend yield of 3%, and double-digit returns next year are more than possible - they are probable.

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The second bank stock we love right now is WSFS Financial Corp. (NASDAQ: WSFS).

As you know, bear markets are wonderful buying opportunities.

There's a reason investors like Warren Buffett build cash hordes in anticipation of a "blood in the street" event.

With the recent sell-off in stocks, there is definitely blood in the street.

For WSFS, that resulted in a 30% drop in valuation.

Does that make any sense considering rates are moving higher?

Earnings estimates are far too low for WSFS.

Shares trade for only 11 times 2018 estimated earnings.

If indeed rates rise in 2019, this stock could double in value.

It won't take much on the earnings front combined with PE expansion.

Just a 10% profit growth and a 15 multiple puts WSFS at $60 per share.

Not a bad return on a stock trading for under $40 today.

The third banking stock we recommend right now is Washington Trust Bancorp (NASDAQ: WASH).

The Russell 2000 index of small-cap stocks has lead the way into bear market territory.

Many names that make up that index are down 50% or more.

That's more than a bear market.

That's a disaster for those heavily invested in the index.

In addition to protection from declines, banking stocks are somewhat of a safe haven.

In the case of Washington Trust, shareholders may have lost 20% from the peak, but that is a far cry from losing half your value or more.

Interestingly, Washington Trust has perhaps the best valuation metrics of the three bank stocks mentioned today.

From an earnings perspective, shares trade for just 12 times 2018 estimated results, with earnings poised to jump more than 6% in 2019.

After the yield curve corrects, look for all of these bank stocks to soar, including Washington Trust.

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