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By Renee O'Farrell

Bank of America (BAC) has been the big winner so far this year, returning over 65% in the first quarter, but if you were thinking that the second largest bank in the country has reached its peak, think again. In this article, I explain why I think Bank of America is a new "buy-and-hold" forever stock.

In mid-April, after the share price slipped slightly, reducing Bank of America's YTD return to around 48%, Guggenheim analyst Marty Mosby upped his rating of the stock from neutral to buy. Mosby forecasts a 20 cents increase in the company's earnings per share and sets a one-year target price of $11 a share. The stock is currently trading for less than $9 a share. If Mosby is right, that is a 22% upside - and that is not even counting Bank of America's dividends.

Sure, right now the company's dividends are practically non-existent at just 1 cent a quarter - but it won't always be that low. Bank of America sought to increase its dividend last year but was rejected by the Fed. In response, and maybe a little in embarrassment, the company has said that will not seek a dividend increase in 2012 - but there is always next year, and a surprise dividend increase should not be ruled out.

Bank of America is actually positioned pretty well right now. It passed the Fed's stress test and its numbers are looking really good. The company's revenues are up over 10% compared to the same quarter last year. The increase led to an improvement in the company's earnings per share, bringing it from a loss of 38 cents a share in 2010 to a loss of just 2 cents a share in 2011. Analysts expect that Bank of America will be able to generate 67 cents earnings per share in 2012. The gross profit margin for the bank also got a lift. It now comes in at a respectable 75.50%.

To its credit, the company is also valued low relative to its peers. Bank of America's forward price to earnings ratio is 8.71, compared to its industry's average of 10.88. Bank of America is also priced at a discount to its peers relative to its book value (0.42 vs. 0.82), sales (0.75 vs. 1.59) and cash flow (1.51 vs. 11.93). Of course, that is not to say that everything with this company is great. Bank of America has a very high debt to equity ratio of 2.71, which is higher than its industry's average. Also, last year the stock lost almost 61%, so its impressive first quarter really only allowed the company to "break even," so to speak.

I think that Bank of America suffered in share price because of the economy, fears over the European debt crisis and a generally bearishness toward big banks, more so than the company deserved, leaving it underpriced. To my mind, Bank of America is a good buy, but investors will probably have to hold onto it for at least a year to realize that value. Further, I doubt the price will go much lower. I think Bank of America and other stocks like it are on the rebound, so buying in now, while the price is still low makes sense.

Rival Citigroup (C) is currently trading at just under $34 a share after returning just over 16% year to date. Analysts give it a mean one-year target estimate of $43.45, leaving a projected return of almost 28% including its 4 cent dividend, but Citigroup did not pass the Fed's stress test, so I am not sure how accurate these estimates are. Granted there was apparently some error in the calculation, but it was slight.

Citigroup lost less in share price than Bank of America last year, declining only 46%, yet the company's earnings per share fell over 22% compared to the same quarter last year, and its revenue fell almost 7%. Citigroup is priced lower than Bank of America in regard to its future earnings, with a forward price to earnings ratio of 7.32, but its price to book value is higher (0.57 vs. 0.42) as well as its price to cash flow ratio (2.15 vs. 1.51).

Competitor JPMorgan (JPM), which famously announced it had passed the stress test prior to the planned Fed announcement, is positioned much better than Citigroup. JP Morgan is currently up almost 25% year to date and trading at just under $44 a share on a mean one-year target estimate of $52.47. If analysts are right, that would be over 19% upside - closer to 22% counting the company's $1.20 dividend (2.70% yield).

JP Morgan's earnings per share declined nearly 20% compared to the same quarter the previous year, but it was able to increase its earnings for the year from $3.96 in 2010 to $4.47 in 2011. Analysts expect the company's earnings per share to reach $4.76 this year. JP Morgan is priced at a discount to Bank of America relative to its projected earnings (7.92 vs. 8.71), but it is priced higher relative to its book value (0.91 vs. 0.42), sales (1.51 vs. 0.75) and cash flow (1.74 vs. 1.51). Personally, I think Bank of America is more attractive.

Wells Fargo (WFC) also passed the stress test and, like JP Morgan, is able to offer dividends higher than many rivals, however it does not have the bullish outlook enjoyed by many of it peers. The company recently traded at just under $34 a share on a mean one-year target estimate of $37.40 a share, indicating that analysts expect just 10% in upside. Add that to its 88 cents dividend (2.60% yield) and you are looking at an estimated one-year return of less than 13%.

The numbers seem rather low, given that Wells Fargo was able to boost its earnings per share by almost 20% compared to the same quarter last year and over 27% for the year ($2.82 in 2011 from $2.21 in 2010). The market expects the company will deliver an earnings per share of $3.20 this year. The company is also priced higher than its peers relative to projected earnings (9.37 vs. 9.24), book value (1.27 vs. 1.13), sales (2.03 vs. 1.73) and cash flow (12.99 vs. 6.55). This type of premium is not uncommon where massive growth is estimated, but given the low predicted upside, I would not recommend buying into Wells Fargo, as good a company as it may be.

Capital One (COF) also passed the Fed's stress test. It is currently trading at just under $54 a share on a one-year estimate of $62.39 a share. At this rate, investors can expect over 15% upside, or roughly 16% including the company's 20 cents dividend (0.40% yield). That may sound pretty good - especially given Wells Fargo's expected one-year return of around 13% - but that doesn't mean it is great. The company's earnings per share fell drastically quarter over quarter, going from $1.53 a share to 89 cents a share.

While Capital One's earnings are low, so is its valuation. Compared to its peers, the company is priced low relative to projected earnings (7.95 vs. 11.39), book value (0.86 vs. 2.56), sales (1.38 vs. 1.87) and cash flow (3.43 vs. 5.49), but still not quite as well as some of the other companies we looked at today - Bank of America and JP Morgan especially.

I recommend investors buy into Bank of America and hold on for the long haul. It has strong expectations and low valuation. Plus, I see great things in store for the company, and its investors, as the economy improves.

Source: Bank Of America: A New 'Buy-And-Hold' Forever Stock