Bank of America (BAC) has had its ups and downs this year. Between the negative press of charging for debit card use as well as the robo-signing of foreclosure documents, to the positive press of negotiating more short sales faster, and a pilot program that allows homeowners in default a chance to stay in their homes and rent the home from the bank or another owner.
I have noted these developments and others within each of my articles beginning back in December of 2011 with this article, in which I announced my intentions to buy BAC at $5.17/share and the reasons behind it.
Since that time I have also moved the stock from our risk basket to a core portfolio position to be held for the long term. The price of the stock got up over $9.00/share and in retrospect perhaps I should have taken some chips off of the table to pocket a profit, but I did not. I even began buying more shares in earnest, when the price dropped back down to under $7.00/share and let everyone here know my intentions with this article. The fundamentals dictated my actions.
I am hoping many have followed along and held on because it's my firm opinion that based on various key fundamentals that we will see a continued trending upwards over the long term. My personal target is now over $20.00/share within 12-24 months.
What Are The Fundamentals That Support My Position?
First let's look at the short interest in Bank of America and the rest of the big financial stocks. Not since 2009 has the short interest been as high as it stands right now, according to this report from Fox News:
Bank stocks rallied early this year but have surrendered much of those gains amid concerns about Europe's debt crisis and economic uncertainty in the U.S. and China. Many market participants expect further selling, as indicated by the increased bets by short sellers, who borrow stock from financial institutions and sell it, hoping to return shares to the lender after buying them at a lower price if the stock falls.
The increase was primarily due to a 61% jump in short interest at the largest U.S. banks, including a 75% surge at Bank of America Corp. and a 61% jump at Citigroup Inc. (C), according to KBW.
As short interest increases (and these are fairly large increases) then it bodes well for the bullish case. If the share price begins to rise, those short positions could be forced to be closed, which ignites a short squeeze for a quick pop in the stock just by this fact alone.
What is more compelling are the truly basic fundamentals of bank of America.
- The current market cap is about $85 billion vs an enterprise value of about $150billion ( almost half the value right here)
- An extremely low forward PE of about 7.80
- The current share price to book value is at .38
- It has roughly $640 billion in cash on the balance sheet
- The recent calculated book value per share is $19.83
A book value of $19.83 vs a share price of $7.90 does not have to leave much to our imagination. Adding those other core fundamentals up, and tweaking the forward PE to about 10, should begin moving the share price to well over its recent highs, and into the mid teens and beyond within the time frame I noted above.
I still maintain that this is a risk investment that could face volatility, however based on the fundamentals and the progress that bank of America has already made, investors could be well rewarded by buying and holding shares.
To be sure, all banking stocks face strong headwinds moving forward. With tighter regulations and a potential increase in reserve requirements having an impact on various business models, it will not be smooth sailing all the way.
Take that into account when and if you decide to invest in Bank of America just as you would weigh the basic fundamentals in making any decisions.
As I said, this is more of a risk investment than many of my core holdings, but it is the reward that compels me to own the shares and buy some more when the opportunity arises.
Take a good look at this stock and maybe it could fit into your portfolio also.
Disclosure: I am long BAC.