Some Bank Stocks Worth Buying Despite Bad News

Financial stocks can't seem to find their way to a bottom. Yet investors keep searching for a way to jump back in, hoping for the inevitable turnaround.

Amid a fresh round of bad news from Citigroup and dire predictions about more losses for the entire sector, financial stocks took it on the chin again Tuesday, falling 4%. That led to another round of speculation that maybe the worst was finally over.

While most analysts say you should continue to stay away from the mega-banks like Citigroup, now may be the time to look at smaller, more risk-averse financials that don't have as much exposure to the subprime meltdown.

"Banking is not so bad, it's the investment banking that's causing the problem," Rich Berg, CEO of Performance Trust Partners, said earlier on CNBC. "How many regional or superregional banks are there that are down that have nothing to do with what's going on?"

"There are some opportunities," says Richard Sparks, analyst at Schaeffer Investment Research. "I think it's usually those stocks that have none or very little exposure to the subprime mess. That's probably where you go."

Among a very small list of recommended financials now is Hudson City Bank , which Sparks says is a good example of an institution that has remained "away from that money center subprime mess."

Also, State Street is an investment banker that also has managed its risk carefully and has Sparks optimistic that it can help lead the industry out of the subprime quagmire, though he doubts it will happen quickly.

"Over the longer term I think the market's going to reward fundamentals, and clearly the banks that have stayed away from the huge writeoff losses that the bigger banks are taking are where your opportunities are going to be in the longer term and even in the shorter term," Sparks says.

Finally, he also likes MasterCard , which he thinks will benefit from Visa's possibly record-breaking initial public offering expected to debut this month, despite the looming troubles for credit cards.

In the broader picture, the sector has its supporters and detractors.

Charles Massimo, whose CJM Fiscal Management practices passive asset management and advises clients on entire asset classes rather than specific stocks, likes the sector and the smaller players in particular as the economy fights to avoid recession.

"They offer more risk but they offer the great potential for return," Massimo says. "If you look at the financials now, they have a high book-to-market ratio. They are probably some of the most attractive stocks out there for longer-term returns."

Stocks with high book-to-market values are typically considered undervalued, a category in which Massimo considers financials to fit, and they are the ones, along with small-caps, that lead the economy out of recession.

As such, he's advising clients to take about 30 percent of their money off the sidelines and into financials, either through index funds like Vanguard or exchange-traded funds.

"If you buy them here you're going to be well-rewarded," Massimo says. "It might not be next week or next month ... but these are the areas that have historically rewarded our clients the best."

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