I Swear It's Not Too Late To Find Gains In Bank Of America

| About: Bank of (BAC)
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You haven't missed the boat on Bank of America (BAC), I'm telling you. Some people, myself included, find it tough to pile into a stock after its already made astronomical gains. Bank of America isn't one of those cases for me. Aside from gaining 32% over 2013, there is no way that this bank isn't going to continue to grow in the coming year - taking the stock price, and potentially dividends with it.

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I pointed out BAC in a recent article about my 8 Attractive Trades for 2014 - as one the companies that I would recommend holding long throughout 2014 based on the following reasons:

  • With continued cost cutting that's going to run into 2014, Bank of America is set to continue producing an improving bottom line, regardless of possible stagnant revenues.
  • Although legal issues remain the Bank's biggest caveat, BAC continues to settle litigation relating to the subprime crisis one at a time and will continue to do so in 2014.
  • CEO Brian Moynihan remains focused on the fundamentals, leading with a clear head, and is the backbone of the bank's lucrative performance in 2013.
  • Warren Buffett, already yielding a $5 billion profit on paper in his Bank of America investment, remains satisfied in the company and hasn't sold his position.
  • Bank of America dividends are expected to rise in 2014.

All of this sentiment was again given a shot in the arm this morning, when Citi issued an upgrade specifically for the same reasons I've been pushing a long position in the banking giant:

Citi upgraded Bank of America (NYSE: BAC) from Neutral to Buy with a price target of $19 (from $16). Analyst Keith Horowitz also sees value in JPMorgan Chase & Co. (NYSE: JPM) and raised its price target to $72 (from $66).

"We believe BAC has built-in earnings drivers on the cost side which puts us slightly ahead of consensus. Also, if US economy continues to improve, we believe investors will look to BAC (as well as JPM) as a play on the US economy due to an asset sensitive balance sheet and exposure to the US consumer. We see similar value in JPM, and are raising the target price to $72 with an expected total return of 27%. We expect JPM to beat modestly in 4Q13 and BAC to report in-line results for 4Q," said Horowitz.

"We expect BAC to continue to meet expense save targets going forward and the lower execution risk will result in potential upside to the valuation. We estimate the market implied cost of equity for BAC at 11.7%, which is a beta of 1.29 (based on a 1.5% risk-free rate and 7.5% cost of equity.) Assuming a decline in the Beta of 1.25 due to lower execution risk would result in a cost of equity of 10.9%, putting our target price at $19," added the analyst.

The bank is trading up 2% on the news on Thursday morning.

Interestingly enough, this comes just days after I wrote about the increasing call volume for the bank heading into its earnings. I in no way think that this telegraphing of the upgrade from options activity is a coincidence.

Additionally, Bank of America options continue to show a ton of confidence behind the company, as they have done pre-earnings for the last few quarters. Options interest has done well to telegraph BAC's coming earnings over the previous few quarters.

Call me a conspiracy theorist, but those who have been in the markets for a long time understand that sometimes there are no coincidences.

The driving force for the company over the past year, again, has been its bottom line, as you can see from this net income chart.

(Source ycharts.com)
(Click to enlarge)

Additionally, respected contributors like Bret Jensen, who even from his picture looks like he has his act together more than I do, are generally in agreement that BAC is a value in the sector. Bret and I agree on two things: that the banking sector is improving as a whole, and that BAC is going to raise its dividend in 2014. Bret, in his article published today, states:

In addition, to the reasons I listed above for positive trends for all major banks, Bank of America has its own attractions as a stock. First, it is one of the few major banks still selling for under book value (The other being Citigroup).

I also expect the bank to receive permission from Federal Reserve in 2014 to reinstate a much larger dividend which would be positive for the equity. Finally, I like the earnings trajectory of the company. BAC earned a quarter a share in FY2012 and is on track to make ~90 cents a share in FY2013. For FY2014, the consensus calls for over $1.30 a share in earnings.

The moral of that story? Even guys that wear suits and look serious think BAC has room to grow. The bank's caveats have it selling under book value still and the two major caveats remain basically the same:

  • BAC's legal issues and coming expenditures remain up in the air. So far, the company has been able to mitigate these costs and continue to hammer out settlement after settlement. This could change at any given time.
  • Cost cutting is only going to get you so far. The company's plans to cut costs were already supposed to make it into 2014. Once the cuts are completed in their entirety, the company is going to have to continue to bolster its top line, as well as its bottom line.

Into 2014, I do not foresee either of these having a negative impact on BAC's continual growth - and I remain bullish here. You haven't missed the boat, it's not too late to find gains on BAC in the coming year.

Best of luck to all investors.

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.