Is Bank of America Still Cheap?

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If you invested in Bank of America (NYSE: BAC  ) at the beginning of this year, then you deserve a pat on the back. Shares in the nation's second largest bank by assets have absolutely soared in the meantime, up a remarkable 76% since the beginning of January. This makes it the top performing stock on the Dow Jones Industrial Average (INDEX: ^DJI  ) by a long shot. The runner-up, Home Depot (NYSE: HD  ) , is a staggering 25 percentage points behind.

But given this performance, it's inevitable that analysts and commentators will begin asking whether or not the bank is still a value stock. A fairly representative example was a recent blog post on Insider Monkey, a blog about hedge funds, which came right out with the conclusion that "Bank of America is no longer cheap."

The support for the position was three-fold. First, as I already noted, its stock is up considerably since the beginning of the year. Second, and as a result of the first point, it's no longer trading for as big of a discount to book value. And third, to quote the post, "On an earnings basis, the valuation isn't quite as good relative to other banks as [B of A] trades at 10 times consensus earnings for 2013."

But even if all of these things are true, which they are, that doesn't necessarily mean that B of A isn't cheap. At most, the only fair conclusion one can draw from these factors is that it's not as cheap as it used to be. And in my opinion, even this is a dubious deduction following the company's third-quarter earnings estimate.

When it comes to stocks, or anything else for that matter, value is both a relative and absolute measure. On a relative basis, the question is: How does one thing compare to other like things. Or in this case, how does B of A's valuation compare to that of the other too big to fail banks JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) ?

In terms of price-to-book value, the most commonly used valuation metric for banks, there's simply no competition. While B of A trades for 0.46 times book, Citigroup trades for 0.57, JPMorgan for 0.85, and Wells Fargo for 1.3. Notably, a similar ranking prevails if one looks at tangible book value as well. Thus, the numbers speak for themselves: on a price-to-book value basis, B of A is the cheapest too-big-to-fail bank.

On an absolute basis, alternatively, the question reduces to an examination of B of A's potential returns. In a recently released in-depth report on B of A, our senior banking analyst Anand Chokkavelu concluded that its stock could "double or triple over the next five years." And, quite simply, as I've noted previously, I couldn't agree with him more.

To appreciate B of A's potential, one must fight the urge to obsess over its current earnings. Look, no one's going to deny that the bank has a lot to atone for given its unconscionable purchase of Countrywide Financial in 2007. The most commonly thrown-around figure places the losses associated with this acquisition at $40 billion or more. But even though this may not seem like the case, these losses won't plague B of A forever.

In a year or two, when investors look back, I believe they'll identify the third quarter of 2012 as B of A's turning point. There are three reasons for this. First, its capital levels are now at a place where the bank can genuinely agitate its regulators for a dividend hike in the first half of next year. Second, there's now an ostensible $6 billion limit (in excess of current reserves) on the bank's biggest residual liability from the financial crisis -- that is, repurchase claims from public and private investors of mortgages originated by Countrywide. And third, for the first time since the crisis, B of A's executives acknowledged that they are now shifting their focus to driving core earnings as opposed to stymieing losses related to its toxic loan portfolio.

The point I'm trying to make is this: While B of A's shares might not appear to be as cheap as they were at the beginning of the year, I believe they're actually cheaper on an anecdotal, risk-adjusted basis. Take it for what it is, as I'm long B of A, but I think owning its shares at the current price is a great value relative to any other bank in the market right now.

To see why are senior banking analyst and in-house B of A expert believes its shares could "double or triple in the next five years," download our new in-depth report on the bank by clicking here now.

John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services recommend The Home Depot and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (11)

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  • Report this Comment On November 03, 2012, at 7:17 PM, kthor wrote:

    I don't want to say it's cheap but rather a value play right now ...i've bought BAC 2nd time and was looking at a third buy couple days ago then stock just soared a bit, but it's still good entry point ..

  • Report this Comment On November 03, 2012, at 7:53 PM, TheDumbMoney2 wrote:

    I have a longstanding LEAP position on BAC for 1/2013 at the $10 strike price that I will convert to shares even if it is below $10 at the last time I can do so. I think it's easily worth $17/share.

  • Report this Comment On November 04, 2012, at 11:18 AM, Seanickson wrote:

    Bac has some problems to work through, but i think fair value will be about book value since a conservative roa for them is about 1. I continue to hold most of my shares but i dont reallyunderstand the argument of them being cheaper than the beginning of the year. However i think bac will prove to be a good investment

  • Report this Comment On November 04, 2012, at 11:42 AM, stockmajor wrote:

    Long BAC and C. The only cloud I see on the horizon right now is the LIBOR scandal and how that may affect these mega banks.

    Other than that, I believe that double and more in share value could easily happen during 2012, but then I've been long these banks since spring of 2009.

    Oh, I intend to buy some more if we get a down turn in the market, which is quite possible in the near term due to the fiscal cliff, etc.

  • Report this Comment On November 04, 2012, at 11:35 PM, Hestheone wrote:

    Bank of America has a derivative exposure of $50.135 Trillion dollars.

    Yeah, buy up the stock. Only good things can happen.

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