Bank of America (BAC) is the second largest bank and a financial holding company in the U.S., with more than $2.2 trillion in assets. Two years ago, when Bank of America was trading at $15.50, John Paulson bought the stock and predicted that it would reach $30 per share by December 2011. Bank of America fell to its 2-year low on December 19th, at about $5 per share, unaided by Paulson's involvement nor Warren Buffett's Berkshire Hathaway (BRK.A) which also owned a stake in the company. Investors were nervous about Bank of America as the stock closed the past year with a loss of 58%. Now, Bank of America is approaching $7.
Bank of America released its Q4 results and beat analysts' estimates on January 19, with a net income of $2.0 billion, or $0.15 per diluted share. For the full year, its net income was $1.4 billion, or $0.01 per diluted share, compared with a net loss of $2.2 billion, or $0.37 per diluted share in 2010. Although Bank of America showed a lot of one-time gains and losses, overall it seems Bank of America is somewhat healthier than it was in 2010. On January 18, Bank of America announced improvements, including the Merrill Edge, a self-directed investing platform.
Bank of America has a market cap of about $69 billion, and has a beta of 2.85. It trades at roughly 7 times its estimated 2012 EPS and has an EPS growth rate of nearly 8%. In addition, Bank of America offers an annual dividend of 0.6%. S&P offers a "Hold" recommendation on Bank of America and suggests a 12 month price target of $8, corresponding to a 21% return. Thomson Reuters believes Bank of America was among the bottom quartile of stocks, and gives a score of 3 on a 1-10 scale. Market Edge recommended a "Buy" on Bank of America, based on technical indicators.
Citigroup (C) is among Bank of America's main competitors. The company has a market cap of $85 billion, and trades a beta of 3.02. Citigroup has a forward PE of 6.53, and its EPS is expected to grow at 9% annually for the next five years. It offers an even smaller dividend yield than Bank of America, at 0.1%. Citigroup lost 45% in the past year. S&P gives Citigroup a "Hold" rating, which is the same as Bank of America, and a 12 month price target of $35, or a 24% return. Thomson Reuters gives Citigroup a 4 on a 1-10 score scale, while Market Edge remains neutral on the stock.
JPMorgan Chase & Co (JPM) is a financial holding company that operates commercial banking, investment banking, and some other businesses through its subsidiaries. JPMorgan has a $138 billion market cap and has a beta of 1.58. The stock has a sound dividend yield of 2.8%. Its forward PE is 7.41 and its estimated EPS growth rate is nearly 7%. JPMorgan lost about 20% in 2011. S&P suggests a "Hold" on JPMorgan and expects the stock to reach $36 in 12 months, which gives only 3% return. In contrast, Thomson Reuters is bullish about JPMorgan and scores it 10. Market Edge remains neutral on JPMorgan based on technical analysis.
On the hedge fund side, seventy-five hedge funds held positions in Bank of America at the end of the third quarter, with a total investment of $2.3 million. Besides John Paulson, Bruce Berkowitz also owned a large stake in the company at the end of the third quarter. Several hedge fund managers initiated new positions in Bank of America during the third quarter, including Mohnish Pabrai, Curtis Macnguyen, Jon Bauer, and Ray Dalio. Meanwhile, David Tepper, Bill Miller, and Eric Mindich were among those who sold out of Bank of America during the third quarter.
Citigroup was in 87 hedge funds' portfolios with a total investment of $5.8 billion. Bill Ackman had the most among the hedge funds we track. His Pershing Square had more than 26 million shares of Citigroup at the end of September. John Paulson and Bruce Berkowitz each had about 25 million shares in Citigroup.
Seventy-eight hedge funds were invested in JPMorgan at the end of the third quarter. Total hedge fund investment in JPMorgan was $4.2 billion. Jim Simons, David E. Shaw, Cliff Asness and Israel Englander were among the managers who boosted their positions in JPMorgan during Q3.
Based on their financial statistics, Bank of America and its rival Citigroup are significantly riskier than JPMorgan. JPMorgan seems to be comparatively more defensive than the other two because it has a lower beta and a significantly higher dividend yield. The three companies' forward PEs and estimated EPS growth rates are very close, and their price paths in 2011 are in line with each other. Bank of America still had a $1.5 billion expense tied to its endless mortgage lawsuits, and large exposures in the eurozone nations. Both may not be solved in the short term. However, before Bank of America dropped more than 30% within a month due to the deterioration of European debt crisis in August, the stock was trading at around $10. So we keep a positive opinion on Bank of America over the long run. It seems the market already discounted Bank of America during 2011, so the company should recover quickly when the debt crisis recedes.
Overall we are bullish about mega-cap financial stocks like Bank of America, Citigroup, JP Morgan, Wells Fargo (WFC), Goldman Sachs (GS), and Morgan Stanley (MS). JP Morgan and Wells Fargo seem to be less risky than the other stocks. Goldman Sachs also seems to be less risky than Morgan Stanley. However, we believe downside risks are already priced in and the stocks that declined the most will outperform the rest.
