Equities surged to their highest point in years today with the news of QE3 hitting the markets. Financials were rewarded the most this week with the anticipation of this news, some yielding 10%+ returns. Bank of America (BAC) was among those included with a staggering +17.65% since last Friday. These recent upheavals have now left the average financial investor with their finger on the trigger wondering if it's time to take the money and run. I would argue against this action for the following three reasons.
First, this new form of QE3 aims to take measures to significantly reduce the unemployment rate by pumping monthly expenditure into mortgage debt relief until it sees a significant improvement. This guarantees the financial sector is lower borrowing rates and additional relief for their mortgage exposure. With this new blessing from the Fed, they can now start focusing on lending again instead of strict reserve requirements. These actions will significantly add to the profitability of Bank of America as well as the rest of the financial sector.
Secondly, I would argue that the majority of these financials remain extremely attractive as they continue to trade far below their tangible book values. My favorite case for this argument is Bank of America . Until this past week it had been trading at a level that was below 50% of its price to book ratio. During the past year, the company has continued to demonstrate strong positive growth in its balance sheet, a focused restructuring of its core assets, a boost in cash flow due to its sale of non-core assets, and a significant increase in consumer confidence apparent in its 69.06% gain since 01/01/2012. Let us not forget about a possibility of an increase in its dividend sometime in the near future.
Lastly, the company has seen a significant reduction in its liabilities on the balance sheet. The past 5 years have left the Bank of America with an questionable future as far as its toxic debt exposure, constant lawsuits, and strict fiscal policy requirements which have impeded the profitability of the company as well as the return for its shareholders. In my opinion, this cloud of hesitation is now being dissipated as the majority of lawsuits have been settled, losses have been account for, and with this new form of QE3, their cash flow will continue to flow. With this pattern of growth, I see nothing but success for Bank of America over the next year and returns that could push this stock back up towards its 4 year highs.
Disclosure: I am long BAC.