Buffett Owns Bank of America While Others Short...Time to Buy?
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When Warren Buffett buys stock for the portfolio of Berkshire Hathaway, generally that act in itself turns that company into a Wall Street favorite. This has not happened with Bank of America (NYSE: BAC). Not only has the share price done little since Buffett invested $5 billion last spring, Bank of America has one of the largest short positions against it of any stock on The Big Board, almost doubling since the spring.
Over that time period, Bank of America has fallen from around $10 a share to about $7.30. For the last quarter of market action, Bank of America is down by 11.29%. It might finally be in a position for the long term investor, like Warren Buffett, to buy again.
Bank of America is not the only financial institution Buffett has acquired for Berkshire Hathaway. He prefers the premier firms that focus on the basic activities in the sector. His purchases in this area have included Wells Fargo (NYSE: WFC), US Bancorp (NYSE: USB), Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE).
The buys of General Electric and Goldman Sachs are instructive for the long term appeal of Bank of America. On October 16, 2008, at the nadir of The Great Recession, Buffett wrote an op-ed for The New York Times entitled, "Buy American. I am." In that piece, Buffett stated quite clearly that, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."
That has played out with his Goldman Sachs and General Electric investments, as each has performed well. For Bank of America, for which Buffett invested $5 billion in August 2011 for preferred shares and warrants priced at $7.14 for the next ten years, that has not yet transpired. That still leaves an opportunity for others to now buy at around the same level as Buffett.
Bank of America compares favorably in many areas with Wells Fargo and United States Bank, both very well-run institutions. The price-to-book ratio for Bank of America is just 0.33. For Wells Fargo, it is 1.22. At US Bancorp, the price-to-book ratio 1.70.
Earning-per-share growth is also strong for Bank of America, up 102% for the year and 120% for the quarter. For US Bancorp, earnings-per-share growth has risen 41% for the year and 17% for the quarter. At Wells Fargo, earnings-per-share growth has increased by 28% for the year and 18% for the quarter. General Electric has earnings-per-share growth higher by 7% for the year and 4.94% for the quarter. Earnings-per-share growth is down 66% for the year for Goldman Sachs and 3.55% for the quarter. The earnings-per-share growth trend is bullish for Bank of America as the current quarter's is higher than the year's, which is much better than the past five year rate.
Over the last week of market action, Bank of America is up by 3.39%. But it still has a long, long way to go before it full recovers from the effects of The Great Recession, particularly its ill-fated acquisition of Countrywide Credit, the mortgage lender. But the signs of recovery are there for Bank of America.
The bank does make money with a profit margin of 11.62%. As Andre Meyer, the legendary former head of Lazard Frere, noted, "No business ever went under making a profit." Bank of America has also started to pay a dividend again, with a yield of 0.55%. Low yes, but the dividend payout ratio is low too at just 4.28%, so there is ample cash flow to increase the dividend or initiate stock repurchase programs in the quarters ahead.
Now trading around $7.30 a share, the mean analyst target price for Bank of America over the next year of market action is $9.33. The 52-week high for the stock was $10.09 with the low being $4.91. In 2007, before the impact of The Great Recession, Bank of America was trading in the 50s. But the company will recover with the economy of the United States, and that is well into the future.
With a beta of 2.32, there will be ample opportunity to buy the stock of Bank of America as it dips. But the company is recovering and will not go bankrupt. Bank of America is a definitely a reward for the long term investor, particularly when the dividend starts to grow. As Warren Buffett wrote almost four years ago: Be greedy when others are fearful!
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Goldman Sachs Group and Wells Fargo & Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.