Buy Wells Fargo, Hold JPMorgan Chase, Trade Bank of America

Richard Saintvilus

However, to everyone else, "financial engineering" means simply earning a check from a 40-hour week and if you're lucky, you're able to invest part of it in a successful stock or two.

Another area of "financial engineering" came to the forefront when investors learned of JP Morgan's(:JPM) extensive derivatives loss in its synthetic credit portfolio since the end of the first quarter -- one where it was recently forced to restate by $459 million, according to a Securities and Exchange Commission filing.

If you are unaware of the term "derivative," you only need to know that Warren Buffett once described derivatives as financial weapons of mass destruction. So if the world's greatest investor holds these complicated financial instruments in contempt, what should it say about the caution that should be applied toward entering equities with these types of exposures -- it means stay away.

However, JP Morgan's loss is also the market's gain -- at least from an educational perspective. It forced investors to not only re-evaluate the state of our banking system, but it also served to bring more scrutiny toward bank balance sheets in an effort to reassess risk and current valuations.

However, the challenge for investors comes when they decide one bad apple taints the whole bunch -- this is simply not true. One prime example is what is going on at Wells Fargo(:WFC) -- in my opinion, one of the best run banks in the U.S. Compared to other franchises around the globe, it should do better than hold its own ground. Last week in its recent earnings report, it affirmed this sentiment.

The bank's slogan is "together we'll go far." Its report showed just how committed it continues to be to live up to this motto as it posted another record profit in the second quarter. For the period ending in June, Wells earned $4.4 billion or 82 cents per share, topping analysts' expectations while demonstrating an annual growth of 17%.

The bank continues to benefit from streamlining its operations as a result of its acquisition of Wachovia, while it continues to see an increase in mortgage refinancing applications. As a result, some of its performing areas for the quarter were in mortgage banking, which earned it $2.9 billion in the second quarter on a record-setting number of applications. Among those, 70% were related to refinancing.

The bank demonstrated exceptional growth in that area as mortgage banking revenue shot up a remarkable 79% when compared to the same period of a year ago. In addition to processing loans, its earnings were helped by a reduction in its expenses to the tune of 5% since the first-quarter.

While some of this trimming was the result of contract renegotiations with third-party vendors, the bank has also been aggressive over the past 18 months in reorganizing its workforce, which has since been reduced by 10% in some of its most expensive locations such as New York.

Overall its entire headcount has been reduced by 2,000 employees since last year -- this is even though it has also been aggressively hiring to fill needs in its mortgage department where it increased its headcount in that area by almost 20% in the second quarter.

As great at these numbers were one of the things that continues to impress me the most about Wells Fargo is that it demonstrates an exceptional level of intrinsic customer focus, a quality that has resulted in not only lower costs on deposits but also loan yields in excess of the industry average.

The bank not only continues to prove its superior management team, but, unlike several of its peers, it is highly transparent and its books are easy to understand.

Furthermore, in a thorough appraisal of its fundamentals, investors will discover that the bank remarkably unburdened by the associated risks stemming from a reliance on derivatives. Also, compared to Goldman Sachs(:GS) or to a lesser extent Citigroup(:C), Wells Fargo is divested from investment banking, proprietary trading and, better still, the adversities of Europe.

In that regard its only peers are names such as U.S. Bancorp(:USB). Also, it continues to be aggressive in capturing more of the potential business from its depositor base -- setting itself apart from regional rivals such as PNC Financial(:PNC) and SunTrust(:STI).

As bad as it seems that the world is beating up on JPMorgan, investors need to realize that the bank will be fine and it will survive this. Though the stock has yet to approach my buy level, I think it should be held and investors should not panic. We've been down this road before as recently as a couple of years ago with not only Goldman Sachs but also with Bank of America(:BAC).

For that matter, the negative press will give investors an opportunity to lock in some profits in turnaround stories like Bank of America. It reports earnings on Wednesday, and analysts are expecting BofA to announce 15 cents in earnings per share on revenue of $22.87 billion, topping last year's quarter where it reported a loss of 90 cents -- largely attributable to mortgage settlement with the Justice Department.

Bank of America reached a year-to-date high of $10.10 in March and is down 22% since then. I would not surprise me to see the stock shoot up by 10% on its report. The volatility will present some opportunities for a quick trade yielding some easy gains.

In the long term, the overall health of the banking sector will emerge stronger than it has ever been. That's what both the U.S. economy and the stock market are known for. But in the meantime, investors will want to seek some shelter from the not-so-good reports that surface -- and this is where Wells Fargo stands out by taking a different approach and it is one that is paying off handsomely.

Though it is reasonable for it to be appraised on similar banking metrics and standards, investors should be able to see that perhaps it should not be grouped with the rest. Moreover, in light of JPMorgan's recent struggles with credibility, a premium will continue to be placed on identifying banks with above-average growth prospects that still meets certain criteria of safety.

Wells' stock is trading at a considerable discount relative to its peers from the standpoint of risk/reward outlook -- making it in my opinion the best financial play today, topping the list of cheapest and safest banks on the market.

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At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.