There are times when I simply do not understand investors' reluctance to take advantage of an opportunity. I see investors either sit on their hands and do nothing, and I also see and hear them stick to old points of view that have nothing to do with the present.
Bank of America (BAC) is a company that has been hated by investors and non investors, and reviled by their own customers, and virtually all taxpayers. After all, the bank needed taxpayer money just to survive. I know that just that one simple fact has been more than enough to keep individual investors away from buying shares for a few years now. I also realize that many investors lost large sums of money by owning BAC stock, and are more than reluctant to buy shares again. I get it. I understand, and I cannot argue with any of it.
The only thing I can do is to point out the facts that make Bank of America a potential blockbuster of a stock right now. I have said it before and I am saying it again.
I believe that Bank of America is an undervalued stock.
Another Look At The Basics
- Shares are selling at a 60% discount to book value.
- Revenue growth grew 97% YOY last quarter.
- Operating margins have grown to nearly 22%.
- Total cash currently sits at over $600 billion.
- The forward P/E ratio is only 8.79, nearly the same as the trailing P/E ratio.
- 54% of outstanding shares are held by institutions.
- If the stock was to sell at just 2x book value, the share price would be over $40.00/share
These facts were not plucked from thin air. They are readily available for anyone to look at on Yahoo! Finance.
In previous articles, I wrote about the goals of Brian Moynihan to make Bank of America the largest "small" bank in the world. In this article I wrote about the cost cutting, the banks capital position, and its lending needs.
I think a quick look at one chart can tell the entire story:
Gross profit margin is up. Revenue growth is up. Book value is up. Share price to book value is down, way down.
In my book, this looks like a huge bargain.
I have also written about the balance sheet of BAC and how the company has been very aggressive at cutting costs, eliminating toxic and/or underperforming assets and settling lots of those mortgage issues that have plagued the bank.
Now we have a few more positives to add to the plus column:
- Bank of America is settling the mortgage issues as part of the agreement reached by State and Federal government officials with 5 banks.
As noted in this article, the settlement could go a long way in actually helping repair the housing mess;
"Of the $26 billion in the deal with the five banks, $17 billion is allocated to be spent to assist struggling homeowners. Of that amount, 60% must be employed to principal reduction and the rest to other programs. The relief must be completed in three years or banks will be fined by regulators."
- Bank of America is becoming more "consumer friendly".
BAC is implementing an easier to read and understand statement, and fee "menu". As noted here;
"Bank of America Corp (BAC) on Wednesday said it will provide customers with new, easy-to-read statements with information about fees for consumer and business checking accounts, following similar steps by other banks.
The two-page "checking clarity statements" will incorporate many of the recommendations made by The Pew Charitable Trusts as well as suggestions from customers, the bank said. The second-largest U.S. bank first introduced simplified fee statements in 2009."
- Bank of America is attempting to end the huge lawsuit with AIG.
In perhaps the biggest wildcard to date, BAC is petitioning the court to throw out the $10 billion lawsuit that AIG brought against them, just about 1 year ago. The details of the suit can be reviewed in this article, but suffice it to say that, if Bank of America succeeds, an enormous overhang will be lifted from the stock in my opinion.
As noted in the article: "Bank of America estimated that it might be forced to pay out as much as $4.1 billion more for litigation and regulatory matters than the unspecified sum it has set aside."
If this lawsuit is tossed out, not only will BAC not have the legal fees to pay, but the amount set aside (in the billions one could assume), can be put right back into the banks cash reserves and back on the asset side of the ledger.
It is my opinion that just about all of the costs of this lawsuit is already reflected in the share price. If we look at the fundamentals, we can see that if this major issue is resolved, and it will be one way or another, then the true value of BAC could finally be reflected in the share price.
On the negative side, if BAC were to lose this case, I believe that the downside is limited. To be sure, this lawsuit could be another tipping point for BAC if it is settled.
To me, the risk/reward is worth a position in many portfolios with an appropriate allocation of funds. In my case, it is no more than 5%.
What is your opinion?
Disclosure: I am long BAC.