It was nice to see my adjusted cost base plummet today as I quadrupled my stake in Bank of America (NYSE:BAC). The stock is trading around $14.25 per share. The dividend was all but wiped out during the financial crisis but I believe that it will come back with a vengeance over time.
Bank of America is very well positioned to reap the benefits of a slow US economic recovery, which is probably in the works. The risk/reward on Bank of America trading at these levels seems very attractive as they own several valuable franchises, have great market share in US deposits, and have paid back their TARP funds. The bank is currently trading at a multiple on around $1.00/share of earnings, which I believe has the potential to expand to $2 without much trouble. This would put the stock price easily into the $20s, which is a signficant jump from here.
The dividend will come back as the years go on, as inventors will want income from their investment in this large bank and the bank will no longer be tied down with the lingering issues of 2008. This stock is rated a strong buy by 70% of analysts that cover it. Earnings will come back as well, albeit slowly, and probably won't get to 2006-2007 levels anytime soon.
This is one of those trades where I felt like I needed to do the Warren Buffet thing and buy when others are selling: when the stock does not look attractive. This industry is still in the toilet, their balance sheet is still recovering, and the economy is still pretty bad. This is a good time to lower my cost base from my purchase years ago. One of those 'close your eyes and click submit' trades.