Bank of America (BAC) has been one of my favorite names since the 2011 meltdown for a variety of reasons. Considering that the stock hit $5 a share at the height of the European debt fears in 2011, we can infer that the stock is very sensitive to panic. Value investors thrive on panic due to its ability to create incredible buying opportunities, and I think that a recent dip in Bank of America's stock provides an opportunity to ride its recovery if you missed out last autumn.
Here are three major reasons to consider this stock today:
1) Massive Cost-Cutting Efforts
Cost-cutting efforts are certainly not unique to Bank of America this year, as the financial industry adapts to a new age of lower risk and financial stability. In a recent report by the Boston Consulting Group, major banks are slicing and dicing upper management salary (again). Investment banks in particular are coming under heavier scrutiny, as the traditional 40%-50% revenue payouts to employees is set to be reduced in order to significantly lower figures.
Bank of America is at the forefront of the cost-cutting efforts. CEO Brian Moynihan has been doing a great job in finding inefficiencies (particularly in Merrill Lynch's operations) and has cut everything from salaries to miscellaneous operational expenses, such as unnecessary or unprofitable branches and office space. In Bank of America's Global Banking division, for instance, non-interest expense has actually dropped from $2.31 billion to $2.17 billion in Q1 2012 (the most recent quarter) relative to Q1 2011. Larger declines can be seen in less traditional branches like Global Markets and Wealth Management.
2) Fundamental Value
Bank of America has been punished much more than the other banks in recent years due to its agonizing litigation expenses related to Countrywide, among other things. Now that those problems are beginning to ease, we are left with an opportunity to buy the cheapest major bank stock available by a variety of metrics.
The price to book (P/B) ratio, which measures the price per share against its book value per share, is an incredibly low 0.41 as of now. This is insane when compared to Wells Fargo (WFC), which is trading around 1.33, or JPMorgan (JPM), which is at 0.92 right now. It's true that Bank of America still has to restructure its balance sheet, which will depress the bank's earnings for a few more quarters. But considering that you are buying $1 worth of Bank of America assets for $0.41, it's hard to pass up the opportunity when looking at bank shares.
3) Recent Market Pessimism
There are a variety of reasons why the broader market has been declining since the end of March (mostly due to weak data across the globe and fears about the Fed's tightening of monetary policy). Still, the last few months haven't been bad enough to derail Bank of America's recovery.
After its last quarterly report (released April 19th), we saw the stock rocket 3% in premarket trading due to the improving fundamentals. A few hours later, it was 5% in the red as the entire stock market began to decline.
There is no getting around the fact that a lot of macroeconomic data is pointing toward a slowdown in global growth going into 2012, but the effect on major banks (like Bank of America) isn't as drastic as people make it out to be. The primary concern for the company is fixing its balance sheet and surviving the aftereffects of the 2008-09 financial crisis.
While there are still legal expenses related to Countrywide mortgages and other similar problems, Bank of America is getting close to reissuing its dividend. Don't forget that the company passed the Fed's stress test (news that was released March 14th), and is prepared for any bad news that may spring out of Europe. Earnings have been improving dramatically, and we've seen substantial declines in provisions for credit losses (a great sign of improving stability).
Ultimately, buying stocks is mostly a matter of timing. I think that the fundamental value of Bank of America shares speak for themselves, but the best buying opportunity will come with the next subpar GDP report or European debt auction. If you can get the shares cheap now, I think it's highly probable that you'll be sitting on 50%-plus gains in a few years, if not more.