It has been a rough ride for many of the largest U.S. financial stocks since the start of the year.
The KBW Nasdaq Bank Index of large U.S. commercial banks has fallen over 15 percent in the first few weeks of January, nearly double than the 8.14 percent drop in the S&P 500.
The Select Sector SPDR Financials, an exchange traded fund that tracks the financial sector, has dropped more than eleven percent year-to-date.
Despite a rocky start to 2016, Dave Ellison, portfolio manager of the Hennessy Large Cap Financial Fund, thinks the sector remains an important part of the U.S. economy.
"Despite volatility due to oil prices, global uncertainty, currency movements and the Federal Reserve, banks appear reasonably valued," Ellison told CNBC's "Power Lunch" on Thursday.
"Credit conditions are good. Deal valuations have come back somewhat. The headwind of low rates and low margins appear to be abating," he said. "Going forward, credit and margins should improve and this will add to earnings, mergers and acquisitions activity and investments in improving businesses."
Among the big banks, Ellison named Bank of America as a mainstay in his portfolio, with 4.5 percent of the fund invested in the company.
"It is a banking bellwether, the largest U.S. bank by deposits, with $2.1 trillion in assets," he said. "While concerns remain about their energy exposure, fixed income and commodities businesses, we believe management is focused on growth and efficiency. The stock is attractively valued for long-term."
New York Community Bancorp, a midcap regional bank doing business on the Eastern seaboard, comprises 2.6 percent of Ellison's fund, due to what he describes as "attractive franchises in highly desirable markets."
Among the small cap banks, Ellison named Independent Community Bancorp an outperformer, and comprises nearly four percent of the fund. "It is a great example of a small-cap, well-run bank in attractive markets south of Boston," he said.
Ellison called Yadkin Financial, a small cap community bank throughout North and South Carolina, another attractive franchise with solid growth. "They are focused on efficiency and asset quality. The pending acquisition of Newbridge Bancorp could lead to double-digit EPS growth over the next two years," said Ellison.
Morningstar awarded Hennessy Large Cap Financial a four star ranking. The fund has $97.5 million in assets under management and a three year return of +12.88 percent.
Ellison owns the four aforementioned stocks through the mutual fund only. He does not hold them in a personal portfolio, nor does anyone in his family. Hennessy Funds does not have any investment banking relationships with any of the companies mentioned.
Hennessy Funds has $6.5 billion in total assets under management.