I already love Bank of America (NYSE:BAC), both as a company and as an investment. Further, the entire banking sector (well, most of it anyway) is trading at historically low valuations.
Having said that, one of the major reasons banks are trading so cheaply is that many investors are reluctant to jump back into these stocks in the wake of the financial crisis. Here are a few things that could make Bank of America a more attractive investment to the masses.
Reason 1: Weakness in the banking sector that has nothing to do with Bank of America
It seems like every day there's a new headline about legal action against one of the banks related to the financial crisis. JPMorgan Chase (NYSE:JPM) has already agreed to a massive $13 billion settlement, and it was recently announced that the company will make a payoff related to the Bernie Madoff mess as well. Citigroup (NYSE:C) has likewise found itself on the wrong end of many settlements.
While some of the settlements lately have affected Bank of America, my point is that any major event that affects one bank tends to bring down the whole sector. The bigger the story, the bigger the drop. For example, remember what happened to bank stocks when it was announced that Bear Stearns was in dire straits? Bank of America (then regarded as a rock-solid investment) lost 5% of its value on that day alone!
The point is that unrelated trouble in the sector, which looks like a real possibility given all of the investigations going on, can create excellent buying opportunities.
Reason 2: Continued improvement in housing (and lending)
After the incredible growth in average home prices in 2013, most industry experts are projecting slower growth in the coming year. Home buying is still at a historic low, and although mortgage rates remain very low historically, they've shot up by more than 1% over the past year, which has caused many would-be bargain seekers to take a step back and wait for better entry points.
There are several scenarios that could cause another year of double-digit housing growth, which would be a great catalyst for banks in several ways. Rates could fall, just as easily as they rose, as soon as the Fed becomes a little clearer on its current monetary policy. Congress could decide to jump-start housing by offering some kind of tax break or other incentive to homebuyers. The point is that there are 100 different scenarios that could happen that could give the housing market a boost.
If the housing market were to perform better than expected in 2014, it would help the banks in several ways. Most obviously, the banks would have more mortgages to originate. Less obvious is that most banks still have a backlog of foreclosures they are sitting on, either for lack of manpower to sell or waiting for higher prices. Some of the hardest-hit markets in the housing collapse, such as Florida and Nevada, are still heavily reliant on foreclosures.
If housing prices were to rise by 10% or so next year, it could mean the avoidance of billions of dollars in expected losses due to unloading the properties sitting on the companies' balance sheets. Even if the backlog of foreclosures continues, it would still mean higher-priced assets making up the bank's balance sheet.
This is by no means an exhaustive report on what could make Bank of America rise in the coming year, but these are the most likely scenarios I see that would make buying Bank of America (or its peers) even more compelling.
Bank of America and most other banks are trading at historically low levels, and in B of A's case, shares are currently priced at less than 1.2 times tangible book value, as opposed to multiples of three to four before the financial crisis. While the valuation won't change significantly until confidence in the U.S. economy improves drastically, the Fed's taper that was just announced as well as the remarkably easy passage of a budget by Congress tell me that we are making terrific progress.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and JPMorgan Chase. 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.