Why Bank of America Is Down Despite Quadrupled Profit

After posting solid gains yesterday, U.S. stocks are falling hard this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.87% and 0.7%, respectively, at 10 a.m. EDT.

Bank of America still looks cheap
I've been a student of Finance and the financial markets for years, and yet I still fall into this trap. After reading the first part of the Reuters headline "Bank of America (NYSE: BAC  ) profits quadruple," I immediately checked the quote page and was briefly, almost instinctively, surprised to find that the shares were down in premarket trading. I shouldn't have been; as Howard Marks writes in the excellent book The Most Important Thing: "First level thinking says, 'I think the company's earnings will fall; sell.' Second-level thinking says, 'I think the company's earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.'"

In other words, expectations provide the context necessary to analyze results and their impact on the share price. And so it was that B of A's quarterly profit rose to $2.62 billion in the first quarter from $653 million in the prior year period, which worked out to $0.20 per share; alas, analysts were looking for $0.22. In addition, total adjusted revenue fell 4%.

It pays to remain focused on what matters relative to your investing style. Mimicking Marks' above distinction, I'd say a trader is concerned with the impact of quarterly earnings on the share price, whereas a long-term investor focuses on what earnings can tell us about a company's future earning power. In that regard, B of A's results look encouraging on a number of fronts: Brian Moynihan is doing a creditable job shrinking costs, and the provision for loan losses continues to decline, while capitalization ratios continue to improve.

Based on the newly released end-of-first-quarter balance sheet data, Bank of America shares are changing hands at roughly a 10% discount to their tangible book value this morning, and they still look like an attractive (i.e., underpriced) risk to me.

Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu and Matt Koppenheffer lift the veil on the bank's operations, detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.


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11/26/2014 4:31 PM
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