One of the smartest and easiest moves I have made in the last year involved Bank of America (BAC) around this time in 2011. The stock was selling at just over $5 a share and fear was still high around owning banking stocks. I sold the Jan 13 $5/$2.50 bull put spread for a premium of a $.80. The play provided an approximately 30% return on the collateral I put up in my brokerage account. I also never really had to worry about the position as BAC jumped up to $7 a share early in the first quarter and has traded in the range of $7 to $9 a share since. I am thinking of opening a similar spread position (Perhaps the Jan 14 $10/$5 bull put spread for $1.80 or perhaps buying the shares at $9.30 and sell a Jan 13 $10 call for $1.25) as I believe the shares will soon break out of their recent range and trade higher by the end of 2013.
Key recent positives for Bank of America:
- Stifel Nicolaus upgraded the shares to a "Buy" from a "Hold" today. The analyst firm cites the bank's success in cutting costs and much improved capital position.
- The election is over. This should mean less bank bashing and governmental actions against this sector as the administration will need to banks to loan to achieve a better economic result in their second term over the anemic performance of the prior four years.
- Housing values continue to improve. Given the bank is still one of the country's largest mortgage originators and holding of residential mortgages, this bodes well for future profit growth. Builder confidence level also just rose for the seventh straight quarter.
4 additional reasons BAC is still a good value play at around $9 a share:
- Earnings are set to jump from just over 40 cents a share in FY2012 to projections of almost $1 a share in FY2013.
- Consensus earnings estimates for both FY2012 and FY2013 have moved up sharply in the last month and BAC sells for under 10x forward earnings, a deep discount to its five year average (18.3).
- Insiders have been net buyers of the shares over the last six months.
- BAC sells for just 45% of book value, one of the cheapest ratios among major banks. I would also look for the bank to be able to increase the dividend payout significantly at some point in 2013.