Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
After closing out a banner year at an all-time high, stocks suffered a "momentum hangover" during the second half of the week, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) declining 0.5% and 0.05%, respectively, on the week. Ford (NYSE:F) and General Motors (NYSE:GM), were two of the biggest movers among large-cap stocks -- in opposite directions -- and Bank of America (NYSE:BAC) was the third-best performing stock in the S&P 500, up 4.7%.
Bank of America's year started on the right foot with an upgrade from Citigroup analyst Keith Horowitz. In a note published Thursday, Horowitz justified the upgrade on the basis of "a cost of equity more in line with history and no longer affected by legacy issues." He continued: "[If the] U.S. economy continues to improve, we believe investors will look to BAC (as well as JPM) as a play on the US economy due to an asset sensitive balance sheet and exposure to the US consumer."
In other words, the risk associated with legacy costs from the credit crisis is subsiding, lowering the bank's cost of equity and, therefore, raising the fair value of the shares. As of Friday's close, the shares were priced at a 20% discount to their book value, suggesting investors have yet to fully dismiss those "legacy issues," so there may well be room for that process to play out.
Furthermore, I see another catalyst for a rerating of the shares: A dividend increase. At 0.2%, Bank of America's dividend yield remains stunted, but tomorrow is the deadline for participating institutions to submit their capital plan to the Fed as part of the annual round of stress tests -- perhaps 2014 will be the first post-crisis year in which B of A pays a decent dividend. If so, that would certainly attract a new class of investors to the stock.
Friday saw the release of auto sales numbers for December -- which had a very different effect on the stocks of the two major car manufacturers, Ford and GM:
The divergence isn't hard to explain when you look at the headline numbers: Ford's December sales rose 2% year-on-year, while General Motors' sales fell 6% (GM sales declined across all brands). However, that may be missing the forest for the trees: 2013 was a fantastic year for both automakers, with Ford registering 14% retail sales growth, while General Motors delivered 11% growth. That was enough to make it the best year for the two manufacturers in at least five years (in fact, it was the best year since 2006 for Ford).
Last week's stock price performance was a reversal of what happened in 2013, in which General Motors outperformed the S&P 500 in 2013, while Ford underperformed. However, assuming 2014 earnings-per-share estimates aren't outrageously aggressive, it's not unreasonable to think they could both outperform the market this year -- at 9.1 times the next 12 months' earnings-per-share estimate for General Motors and 11.1 times for Ford, both stocks look pretty cheap.