If You Hate Bank of America, Then Buy Its Stock!

Source: Wikimedia Commons.

If Bank of America (NYSE: BAC  ) were a senior in high school, it wouldn't be selected as the most popular member of its graduating class. The most despised member, perhaps, though I don't recall seeing that designation as being officially sanctioned by the yearbook staff.

But for an investor, reputational damage like this offers a glaring opportunity. If your goal is to buy low and sell high, then you have to buck the crowd. "When 'conditions' are good, the forward-looking investor buys," notes Fred Schwed in his timeless classic Where Are the Customers' Yachts? "But when 'conditions' are good, stocks are high."

Take Wells Fargo (NYSE: WFC  ) and US Bancorp (NYSE: USB  ) as examples. These are two of the best-run banks in the country. Everybody knows this. And as a result, they trade for a pretty penny. Wells Fargo's stock sells for 1.9 times tangible book value, while US Bancorp's goes for a staggering 2.9 times tangible book.

Can these valuations head higher? Sure, but absent some type of irrational bubble, it's hard to envision that either of them would double. There's simply a limit to how much investors will pay for even the best banks.

Bank of America, on the other hand, presents a case in contrast. At its closing price on Friday, it changed hands for 1.08 times tangible book value. This was second only among the top banks to Citigroup (NYSE: C  ) , which is priced slightly below tangible book value.

Now, to be fair, both of these banks come with significantly more risk attached to them than, say, Wells Fargo. For its part, Bank of America is currently embroiled in litigation over whether a New York judge will approve an $8.5 billion settlement dating back to the financial crisis. If it's not, then the nation's second largest bank could potentially be on the hook for significantly more liability.

And Bank of America also continues to be heavily weighed down by toxic mortgages. In 2011, the operational division that oversees these legacy "assets" recorded a pre-tax loss of $30.6 billion! And while that declined dramatically last year, it still added up to a pre-tax loss of $11.4 billion. Suffice it to say, this will wreak havoc on even the best bank's bottom line.

Citigroup, meanwhile, carries the effectively unquantifiable risk of being directly exposed to virtually every economy on the globe. On top of this, given that it relies to the least extent on domestic deposits, its funding base is far and away the most vulnerable to a liquidity crisis.

Nevertheless, in Bank of America's case at least, I remain a strong believer in the current management's ability to steer the bank through what's left of its unpleasant journey. While this will still take years to complete, they're well on the way. And while the stock has already rallied considerably since the darkest days in 2011, I believe there's a strong argument that it continues to offer the best risk-reward proposition among its too-big-to-fail brethren.

For another bank that fits this description, check out our popular free report "The Stock Warren Buffett Wishes He Could Buy."


Read/Post Comments (3) | Recommend This Article (9)

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  • Report this Comment On August 18, 2013, at 6:25 PM, PEStudent wrote:

    I bought BAC last week based on microfundamental value investing principles. It may go down this year. It may go down more when the government's charges that it mislead investors about $850M in securities hits the fan (which the article forgets to mention). But it's turned the corner and is now posting positive earnings again and it they return just partway back to normal as their history and assets predicts they will, they're a P/E = 10 stock next year.

    So those investing today might lose on paper this year, maybe even next year. But 3 to 5 years from now, Mr. Market should be favoring this stock almost as much as Wells Fargo and the price has an excellent chance of doubling (15% or better avg. increase).

    Additionally, the government will certainly allow it to increase dividends in the not too distant future from the 1 cent/qtr. it's restricted to now.

  • Report this Comment On August 18, 2013, at 6:32 PM, jonconnery wrote:

    Merrill and John Thain are the toxic stain on BAC, forced on it by Bush and gang .. Ken Lewis would never have purchased it without a lot of arm twisting by that administration .. Same with Countrywide ...

  • Report this Comment On August 18, 2013, at 7:11 PM, InsaneWayne wrote:

    I've owned 1,400 shares of BAC since the $6 range when Occupy Wall St was hating it. If you can't beat'em, then why not join'em?

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