Anyone who took the initiative to invest in Bank of America (NYSE:BAC) at the beginning of the 2012 fiscal deserves a serious round of applause. Shares in the second largest bank in the United States have soared to great heights, climbing by as much as 76% since the start of the year making Bank of America the top performing stock on the Dow Jones Industrial Average.
However, given this impressive and rapid performance, it is only natural for analysts and investment gurus to begin questioning the bank's viability as a value stock option. Recently this matter was brought into debate on a blog post, with the general consensus being that Bank of America can no longer be viewed as a cheap stock option.
There were many factors contributing to this conclusion. Firstly, it has to be noted that stocks have increased significantly since the beginning of January. Next, it is no longer possible for the stock to trade at as big a discount to book value. And lastly, as stated in the Insider Monkey blog post, "On an earnings basis, the valuation isn't quite as good relative to other banks as Bank of America trades at ten times consensus earnings for 2013."
Even if each of these factors can and should be taken as truth, this is not to say that Bank of America is not an inexpensive investment option. At best, the only realistic conclusion that can be arrived at is this: Bank of America is not as affordable as it used to be.
When speaking with regard to stock options, value is measured both relatively and absolutely. Relatively speaking, how does Bank of America measure up to the competing banks that are also too big to fail?
Still Trading at a Reasonable Price to Book Value
Speaking with regard to price to book value, the Bank of America typically trades at 0.46 times book value, whereas other larger banks trade from 0.57 to even 1.3 times book value. Following this pattern, it would appear that Bank of America is still the least expensive of the major banks in terms of value investments.
Alternatively, the question is raised in regard to Bank of America's potential for returns. Some analysts have forecasted that stock in BAC could reach multiples of two or even three times its current value in the next five years.
In order to fully respect and appreciate the true long term potential for Bank of America and its stock, investors must suppress the urge to focus too heavily on current earnings. True, the financial mega house has a lot to repent for given some pretty heinous business decisions in the last few years. However, it should be said that, even though large in quantity, these losses will not keep Bank of America out of the game for long - nor will these losses defeat them permanently.
Bank of America Shares Set to Rise Over the Next Five Years
It is widely accepted amongst analysts and current investors that the end of the 2012 fiscal will serve as a significant turning point for the Bank of America for three very prominent reasons. Firstly, current capital levels have reached a point where BAC can agitate its regulators for a hike in dividends during the first quarter of 2013. Next, a $6 billion limit has been placed on the bank's largest residual liability. And lastly, Bank of America has finally stepped up and assumed responsibility for needing to redirect their focus to earnings generation.
While Bank of America shares may not be as inexpensive as they once were, they can be viewed as being less risky than they were at the beginning of the year. And, when compared to the other too big to fail financial houses, they are still the most affordable. From an investment perspective, owning shares in this bank presents a far greater value than owning shares in any other large bank in the market at the current time.
It is Recommended to Get in While the Value is There
This may not be a great time to sell you current Bank of America shares, but it is a great time to buy and hold - especially given the potential for earnings over the next five years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.