Bank Of New York Mellon: Misunderstood And Mispriced

| About: The Bank (BK)

Bank stocks are being shunned by investors lately. However, where this is extreme pessimism, there is long term opportunity. One bank stock that has much less exposure to the volatile credit and housing markets, but that is priced like its brethren, is Bank of New York Mellon (NYSE:BK).

"The Bank of New York Mellon Corporation, a financial services company, provides various products and services worldwide. The company’s Asset Management segment offers a range of equity, fixed income, cash, and alternative/overlay products, as well as distributes investment management products. Its Wealth Management segment provides investment management, wealth and estate planning, and private banking solutions to high-net-worth individuals and families, charitable gift programs, endowments and foundations, and related entities.” (Business Description from Yahoo Finance.)

Eight reasons BK is a buy at $18 a share:

  1. It is selling at the bottom of its historical valuation range based on P/E, P/S, P/B and P/CF.
  2. It appears to have built some technical support at $18 (see chart):

    Click to enlarge

  3. BK has an AA- rated balance sheet, a low beta (.77) and yields 2.7%.
  4. Most of its revenues come from fees. This gives it a more dependable earnings stream than other banks, although it is being put in the same boat by investors.
  5. 4 different insiders have bought approximately $3mm in new shares over the last two months.
  6. Nelson Peltz’s recent activism with State Street could be the catalyst that unlocks value in the sector.
  7. BK has a forward P/E of just 8.5 and a five-year projected PEG of .72. Both metrics are about at a 40% discount to its historical average.
  8. BK is under analysts’ price targets. Credit Suisse has a $25 price target on the stock, and the median analysts’ price target on BK is $28.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.