One of my favorite quotes by one of the all time great investors, Benjamin Graham, is "The market is a pendulum that forever swings between unsustainable optimism, and unjustified pessimism. The intelligent investor is a realist who sells to optimists and buys from pessimists". Both Graham and Warren Buffet strictly followed their policy of buying when others are selling. I believe this is the perfect time for that policy to be used in regards to Bank of America.
When BOA, and the entire financial systems, solvency was questioned, it was trading at about $4 a share. Since then the stock as seen over a 300% gain before retreating back down to its current share price of around $14 a share. The fundamentals for this company are still strong after weathering through a tough 2007 and 2008. Although the company has cut its dividends to virtually nothing, I could see them making a come back down the road once the company is able to get back to remotely where it was prior to the financial crisis.
The stock has been on a pretty steep decline from it April high of 19.47 a share, dropping 27%, and taking another hit recently when earnings fell short YoY, even though it beat analyst estimations. Going forward, BoA is expected to post profitable quarters for Q3 and Q4, but there is some concern that profits could take a further hit due to the financial reform bill that was passed recently, and the credit card regulations passed last year. Also much of the companies sales in Q1 came from one time income from sale of bank assets.
So you might wonder, why am I recommending Bank of America with such pessimistic outlook provided by the economy for the company? There are many reasons for this. First, Bank of America trades very slightly above its tangible book value, and is well under its overall book value. Tangible book value per share for BOA, the value per share of the companies assets minus intangible assets(or its liquidation value), is $12.11. That means as of Wednesdays close, it's trading at 1.2x its tangible book value. Compare that to JP Morgan and Wells Fargo, which are trading at 1.5x and 1.8x respectively. BOA overall book value per share is 23.24, while JP Morgans(which trades at around $41) is 43.04, and Well Fargos (which trades at 27.93) is 22.89. Thus looking at this information, Bank of America definitely has much more value to it than it stock price shows.
As the Economic conditions improve, so will Bank of America's profits. Yes, the short term might look gloomy as uncertainty still remains in the economy, but Bank of America is more than capable of producing $2-3 per year of earnings in the future, which makes it even more attractive. Lets not forget, Bank of America has the largest deposit base in the United States. This is definitely not a short term play. This is a long term investment, where I target the price of Bank of America to be trading comfortably in the $20 range in the future. Thus patience is required for it.Bank of America could easily see a little further decline in price due to general market correction. Therefore you should be surprised to see it trading in $13 dollar territory or even at in the $12 range. Like I said patience is required for this stock, and patience can pay off in very rewarding manner in the future. I would say any decline in price to those ranges makes the stock even more attractive. If you are looking to get into Bank of America, I would say buy in the $13 territory, and keep buying if the stock gets cheaper. I'll be looking to buy into the stock as soon as it starts trading below $14.
Disclosure: No Positions