Merrill Lynch Looks Cheap on a Price/Book Basis

I added Merrill Lynch to my portfolio for a variety of reasons, mainly valuation. For one thing, MER looks cheap on P/B basis. Considering MER's ROE is 45% higher than normal, it should easily be trading well above its 5 year average P/B of 1.9 (currently P/B is only 1.95).

MER share price took a dip after announcing record earnings (and beating estimates) on July 17th. One possible explanation is the street fears potential losses from MER?s sub-prime mortgage exposure. However, only 2% of MER revenues come from sub-prime mortgage activities, and they have a well diversified earnings stream.

Additionally, MER has recently repurchased $2 billion worth of common stock (a good sign) and has $4 billion remaining under its authorization.

Disclosure: Author is long MER