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Better Buy: Wells Fargo vs. Bank of America

By John Maxfield - Mar 3, 2016 at 10:11AM

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It depends on what you're looking for.

If you're trying to decide between investing in Wells Fargo (WFC 0.00%) or Bank of America (BAC -0.36%), the issue boils down to your investment objectives and tolerance for risk. If you're comfortable with risk and are looking for a quick valuation play, then Bank of America is the better of the two. But if you're looking for a stock that you can buy and hold for decades, then Wells Fargo takes the cake.

The main appeal of Bank of America's shares is that they're cheap, trading for a roughly 20% discount to tangible book value. That's half of Wells Fargo's valuation, as its shares are selling at a 67% premium to its tangible book value.

Data source: Yahoo! Finance, Bank of America, and Wells Fargo. As of Feb. 18, 2016.

Investors simply don't know what they're getting when they invest in Bank of America. It's akin to "cohabiting with a two-ton rhinoceros: When it's good, it's not very good, and when it's bad, it's really beastly," a KBW analyst once said.

Its earnings over the last few years bear this out. They've been all over the board. Some quarters, they're up. Other quarters, they're down. Since 2011, they've fluctuated by a median of 66% compared to the prior-year period. Wells Fargo's by contrast have grown at a median rate of 13.5%.

Data source:

Much of this has to do with the unconscionable amount of legal liability that Bank of America has incurred thanks largely to its 2008 acquisition of Countrywide Financial. It's since absorbed more than $60 billion worth of legal expenses. And that's on top of $135 billion worth of other crisis-related costs.

In addition, Wells Fargo is much more profitable than Bank of America. Wells Fargo's return on average common stockholders' equity last year was 12.7%. While this was down from the previous year's 13.4%, it was twice that of Bank of America's 2015 return on average common equity of 6.3%.

It accordingly makes sense that investors would be willing to pay twice as much for Wells Fargo's shares when you consider that it's twice as profitable as Bank of America.

All this aside, there's no question that Bank of America is turning things around. Last year was the first time since the financial crisis that it had strung together four consecutive calendar quarters of respectable profits. As its CEO Brian Moynihan noted in the bank's fourth-quarter press release, its 2015 earnings were its highest in nearly a decade.

If Bank of America continues in this direction, then it's reasonable to assume that the turnaround will at some point be reflected in the valuation of its shares. And even if they only increase to one times tangible book value, which could happen over the course of a year, this would still equate to a 24% rise from today's price.

Either way, however, if you're instead looking for a dependable stock that's likely to outperform the industry and the broader market over a longer time frame, then you'll want to go with Wells Fargo. The California bank is firing on all cylinders when it comes to running a profitable bank -- and has been for a long time.

It's efficient. It's obsessive when it comes to risk management. And, unlike Bank of America, its history isn't replete with destroying shareholder value through imprudent and overpriced acquisitions. It's these points that have endeared Wells Fargo to Warren Buffett, its largest shareholder and perhaps the greatest investor of all time.

John Maxfield owns shares of Bank of America. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short March 2016 $52 puts on Wells Fargo. 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

Bank of America Corporation Stock Quote
Bank of America Corporation
$36.28 (-0.36%) $0.13
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$46.14 (0.00%) $0.00

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