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Why Aren't You Buying This Big Bank's Stock?

By Alex Dumortier, CFA - Jan 21, 2016 at 12:24PM

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2016's awful start has created a number of buying opportunities for patient investors. Among mega-cap stocks, Bank of America is one such opportunity.

U.S. stocks are recouping some of Wednesday's losses in early afternoon trading on Thursday, with the Dow Jones Industrial Average (^DJI 0.71%) and the S&P 500 (^GSPC 0.19%) 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%.

Image source: Mike Mozart. Republished under CC BY 2.0.

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:

BAC Chart

BAC data by YCharts.

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.

Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends Bank of America. 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.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,152.01 (0.71%) $239.57
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,305.20 (0.19%) $8.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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