U.S. stocks are recouping some of Wednesday's losses in early afternoon trading on Thursday, with the Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) up 1.51% and 1.48%, respectively, at 12:20 p.m. EST. Consistent with their start to 2016, shares of Bank of America are underperforming, down 0.40%.
Bank of America, the nation's second largest bank by total assets, has been savaged in this year's stock market rout, losing over $30 billion in market value since the start of the year.
The Charlotte, NC lender isn't alone in having suffered massive losses: On Jan. 15, Reuters BreakingViews pointed out that the top six banks had lost an aggregate $130 billion in the first two months of 2016. However, among the six, B of A arguably offers the most attractive combination of valuation, quality, and safety among the top banks.
B of A shares are currently trading at nearly a 40% percent discount to their book value, an 11% discount to their tangible book value, and just 9 times the consensus estimate of 2016 earnings per share. You need to go back to the first half of 2013 to find such depressed multiples. Was that a buying opportunity?
The following graph shows B of A's stock price performance (blue line) beginning in the second half of 2013 compared to that of the Financials Select Sector SPDR Fund (XLF) and the S&P 500:
Note that B of A shares have outperformed both their peers' and the broader market during virtually the entire period, and often by a substantial margin (albeit with higher volatility, too). Over the past two-and-a-half years, this month is the only period of meaningful underperformance other than early 2015.
That strongly suggests to this columnist that the stock started out undervalued, at least on a relative basis.
Yesterday, investment bank Sandler O'Neill upgraded Bank of America from hold to buy. Analysts Jeffery Harte and Sumeet Mody write:
While we remain concerned about Bank of America's relative medium-term revenue growth prospects, we believe the current share price more than reflects these concerns. Assuming our belief that a global recession does not loom in 2016 is accurate, we see significant upside to Bank of America shares from their current valuation.
But even if we were to assume that a global recession occurs in 2016, investors would then likely be hard-pressed to select mega-capitalization stocks that will perform well in the near term, and B of A's shares would still be well-positioned to outperform.
In any case, genuine investors have the wherewithal and temperament to look out further than the next 12, or even 18 months. On a three- to five-year time horizon and beyond, Bank of America's shares look likely to deliver very acceptable returns from current levels. B of A's slogan is "Life is better when you're connected"; it's time for value-driven investors to (re)connect with this bank's stock.