Bank Of America: Climbing The Wall Of Volatility And Risk

| About: Bank of (BAC)

The stock of Bank of America (NYSE:BAC) performed strongly in 2012, doubling in price from start to finish. This did not take place without some volatility as the stock lost one-third of its value in the spring, falling from $10 down to about $7. The stock experienced a few drops of 10% or more later in the year. However, after each drop, the stock went higher. The company's resiliency is showing as it continues to climb the wall of volatility and risk.

Bank of America is susceptible to economic sensitivity. Whenever recession fears in the U.S. or in other regions arise, investors are ready to flee to safer assets and the stock sells off abruptly. Thus far in the U.S., the recessionary fears have not translated into an actual economic downturn after the financial crisis of 2008. Whether it is fears of recession due to European debt contagion or a slowdown in China, BAC stock experiences significant volatility with occasional sharp declines. However, the stock has been resilient and comes roaring back when these fears are calmed.

One primary risk with regard to Bank of America is its exposure to delinquent loans. However, the company reported that the amount of 60-plus day delinquent loans should be approximately 400,000 at the end of 2013 as compared with 773,000 at the end of 2012. This will significantly improve the balance sheet as the loan portfolio improves.

Another risk includes lawsuits against the company regarding unfair lending practices. As an example, the settlement with Fannie Mae last quarter caused a charge of $2.5 billion for representations and warranties.

Looking forward, the economy should continue to see incremental gains and the lawsuits facing Bank of America will eventually wind down. Having a long-term perspective and not worrying about the short-term fluctuations in the stock price would be wise for investors.

Bank of America's valuation remains attractive. The company is trading at just over half of its book value per share (price-to-book ratio of 0.55). The company has a single-digit forward P/E ratio of just 8.7 and a PEG ratio of 0.61. The company was trading over 1.5 times its book value per share before the financial crisis. I think that the stock has some room to run for the long-term. I don't necessarily think that the stock will double again in 2013, but I think there is a good chance that the stock beats the market for the next five years beginning at the current valuation levels.

The company reported some significant improvements in its Q4 2012 report:

  • Long-term debt was reduced by $11 billion in Q4 and reduced by nearly $100 billion for 2012.
  • Earnings per share of $0.03 beat estimates of $0.02.
  • Net interest income increased to $10.6 billion in Q4 from $10.2 billion in Q3.
  • Average loans and leases increased 4% over Q3.
  • Average deposit balances increased 15.8 billion or 6% over Q3 to $268 billion.
  • Investment banking fees increased 20% over Q3 and 58% year-over-year.

Bank of America is expected to grow earnings annually at 18.76% for the next five years. Given the company's current low valuation, the stock price has the realistic potential to double the performance of the S&P 500 over the next five years. Other possible future catalysts for the stock include increases in the dividend payments and stock buybacks. As the company continues to improve its balance sheet and grow earnings while the economy slowly improves, Bank of America should continue to climb the wall of volatility and risk.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.