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In my first Bank of America (BAC) article from May 22nd I recommended readers "Buy the Pullback" in BAC shares; it was a simple valuation call with the stock trading at just $6.78. Since that recommendation BAC shares have rallied over 15% higher. Despite the share gains the bank still trades at a significant discount to both the S&P500 and its financial peers. With a stated book value of $19.83 per share, and a market value of $7.80 per share, BAC is a risky but undervalued stock at these levels.

Valuation:

Remember, after passing the Fed's key stress test BAC shares rallied from $8 to just under $10 in a week. Even at $10 a share, +20% from Friday's market price, the shares would trade for just over 10x 2013 earnings of .94c per share. Add in higher interest rates and decent loan growth and BAC will crush 2013 earnings projections. With growing earnings and a small bull market the shares will double. With a book value of $19.83 (which is high), a $13 to $15 share price should be only a year or two away for holders.

Earnings:

Here is the heart of the buy call: On Friday JP Morgan (JPM) and Wells Fargo Co. (WFC) reported strong earnings, and most importantly growing business loan demand and strong mortgage origination growth. With JPM beating earnings by 44% (earnings here), and WFC confirming the mortgage market is healthy (earnings here), BAC should report a good quarter next Wednesday the 18th.

Risks:

As always, if European markets roll over for weeks on end the US market will eventually follow; beware 25% unemployment in Spain.

Conclusion:

BAC shares are a great buy here at $7.80. Earnings and outlook should be strong, sending shares higher. Investors will tell you BAC shares are risky, but the long-term value is compelling. The US economy and housing market are slowly recovering and BAC is one of the best ways to gain exposure to that recovery. Also of note is that famed "buy and hold" investor Warren Buffett has invested billions in BAC, and he's usually pretty good at buying undervalued stocks. For both the short and long term, BAC shares should head higher.

Always do your homework - also see BAC SEC filings.

Source: Buy Bank Of America Ahead Of Earnings