Shares in Bank of America (NYSE: BAC ) have been on a tear of late. Since the beginning of the year, the bank's share price has nearly doubled. The stock opened at $5.75 on the first trading day of 2012, and today it's flirting with $10. It's up 25% since the beginning of this month alone!
Although it may seem like investors missed the boat, I believe the recent performance is only a taste of what's to come. It's my opinion, in fact, that shares in the nation's second largest bank by assets could realistically hit $20 in the foreseeable future.
Bank stocks should converge
There's no question that BofA made a number of mistakes leading up to and during the financial crisis. Its purportedly forced purchase of Merrill Lynch in 2008 saddled the bank with massive quantities of toxic collateralized debt obligations. And its voluntary acquisition of Countrywide Financial earlier that year exposed it to billions of dollars in liability associated with the mortgage originator's questionable lending practices.
It's for these reasons that BofA's stock price has been hit harder than its peers over the last few years. As you can see in the chart above, its shares are down 80% since 2007, whereas the banking industry overall, measured by the SPDR S&P Bank ETF (NYSE: KBE ) , is down a comparatively modest 56%.
What's important to note, however, is that these performances seem bound to converge as BofA continues mending its wounded balance sheet. And when they do, it's more likely that BofA will ascend to meet its peers, as opposed to the other way around. Just this year, for instance, BofA shares have outperformed its closest rivals, Citigroup (NYSE: C ) and JPMorgan Chase (NYSE: JPM ) , by orders of two.
Valuations will matter
Experienced bank investors often say that one should buy bank stocks when they trade for half of book value per share and sell them when they trade for twice that same measure. Among money center banks, in turn, BofA is the only one that fits this bill:
Price to Book Value
Price to Tangible Book Value
|Wells Fargo (NYSE: WFC )||1.41||2.29|
|Bank of America||0.50||0.82|
The notoriously conservative Wells Fargo trades for the highest multiple at 1.41 times book value per share. On the other end of the spectrum is BofA, which trades for half of its book value -- that is, the precise point at which the banking cliche suggests one should buy. Even the more conservative measure of tangible book value -- that is, book value after intangible assets such as goodwill have been subtracted -- suggests that BofA's shares are underpriced by approximately 25%. Thus, despite their recent upsurge, shares in BofA likely still have significant upside.
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