- Bank of America's sell-off as a response to the reduction in regulatory capital is a great purchase opportunity.
- Bank of America's long-term value is not in the slightest being reduced by delayed shareholder remuneration plans.
- Savvy investors purchase a leading banking franchise against the crowd for 70 cents on the dollar.
Bank of America (NYSE:BAC) made some negative headlines (again) after the bank announced a crucial error in calculating its regulatory capital. Not surprisingly, Bank of America was exposed to a fair amount of criticism after the reliability of its bank ratios was called into question. As a consequence of its accounting faux pas, Bank of America was asked by its regulator to shelve its capital action plan (both share repurchases and the proposed dividend hike from $0.01 to $0.05 per share).
Of course, delayed shareholder remuneration was immediately reflected in lower share prices -- a drop from which Bank of America has not yet recovered. While suspended capital action plans were responsible for the drop in Bank of America's share price last week, the current uncertainty offers investors a great buying opportunity. Investors with patience and foresight might very well consider the purchase of Bank of America stock in light of the recent sell-off.
Even though share repurchases and dividend increases are out of the picture for the time being, they are likely to be only delayed and will benefit shareholders in the medium term. After all, turmoil, uncertainty and anxiety always create excellent buying opportunities.
Bank of America's stock has corrected approximately 18% since it marked a new 52-week high in March 2014, with the current accounting troubles adding to Bank of America's disappointing performance. I have previously written that the sell-off in Bank of America shares was totally unwarranted, mainly because its income statement wasn't affected by the reduction in regulatory capital amounts. I have strongly endorsed an investment in Bank of America, as a result.
Fast forward a week, and Bank of America appears to still be heavily oversold in the short term: The Relative Strength Index signals a value of 31.98, which suggests that the stock could experience a technical move and an upward bounce any day (gap close). Though I am a long-term investor and refrain from trading to minimize portfolio turnover, I think Bank of America might actually be a good trading opportunity here, too.
There is a good chance that the decline in Bank of America's share price is solely driven by emotions, rather than rational calculus. Fundamentally, Bank of America should emerge from its recent public relations disaster unharmed, with shareholders receiving the benefits of share repurchases and cash a little later than originally anticipated. No real harm done here.
Savvy investors buy against the crowd
It is no secret that I am solidly convinced of an investment in Bank of America. I believe the company has the potential to trade meaningfully higher over the next two years: Economic tailwinds and higher interest rates are likely to support EPS growth for cyclical banking franchises, shareholder remuneration packages will ultimately be implemented (whether in 2014 or 2015 is really of little significance for long-term investors) and multiple expansion for both earnings and book value metrics could also provide tailwinds for Bank of America's equity valuation. Furthermore, I think it is noteworthy that Bank of America has strengthened its core banking business over the last three years, with consistently increasing deposits and loans: A sign that its core business is thriving, even though attention-grabbing news headlines focus more on litigation expenses and settlements.
(Source: Bank of America Corporation, 2014 Annual Meeting Of Stockholders Presentation, May 07, 2014)
The most convincing reason for an investment in Bank of America, however, is its persistent discount to book value, which has only increased over the last week: The banking giant reported a total book value per share of $20.75 and a tangible book value per share of $13.81 in the first quarter of 2014. At a current share price of $14.80, this translates into a discount of 29% to total book value -- a sizable margin of safety, making sure investors can sleep well at night.
While many investors throw the baby out with the bathwater, savvy investors should take a close, unemotional look at Bank of America's value proposition: A forward earnings multiple of less than ten, a discount from book value approaching 30% and emotional selling by investors driving Bank of America's stock deep into oversold territory.
I believe both short- and long-term investors can find an interesting investment/trading opportunity here, and Bank of America's share price is clearly ripe for a bounce. Long-term investors, in my opinion, will still be able to benefit from postponed/updated capital action plans with respect to share repurchases and higher dividends down the road. At $14.80 per share, Bank of America stock is a 70 cent dollar. Strong, long-term BUY.
Disclosure: I am long BAC. 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.