Betting the Bank on Bank of America

Ramesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bank of America (NYSE: BAC) has had a roller coaster ride over the past few years.  Emerging with quite a few bruises from the financial crash of 2008, Bank of America deserves a serious look now--not that all of its woes have disappeared completely, but the worst of the storms appear to have passed.  BofA, as Bank of America is often referred to, beckons even the most timid and reticent of investors.

The first indication that the skies are clear for any stock is its ability to brush off any negative news.  On Oct. 24, news emerged that Federal Prosecutors were suing BofA for $1 Billion (SEE LINK).  The lawsuit alleged that Countrywide Financial, the mortgage issuer that BofA had acquired, had rapidly issued loans without properly vetting the borrowers. According to the Feds, this was part of a scheme called the “Hustle” that sought to speed up the process of loan origination and reselling to Fannie Mae and Freddie Mac (SEE LINK).  BofA's stock barely moved in response to this announcement.  This is in stark contrast to previous occasions where the slightest whiff of a lawsuit resulted in massive stock moves.

BofA’s most recent earnings report was decent, although not spectacular, and the market shrugged that off too (SEE LINK).  Total average deposit balances rose by 6% from the previous quarter, and this is always a good sign.  More importantly, first lien mortgage production increased by 13% from the previous quarter. There are other positives as well, but it is heartening to note that the bread and butter business of BofA is improving.  It appears now that the bank is on the road to appreciation and recovery, although the process is likely to be slow.  More importantly, Wall Street is finally showing patience with this stock.

Taking a look at the core metrics of the stock itself, there appears to be room for growth.  The Book Value per share is $20.40, which is more than what Bank of America is currently trading at (about $9.35).  Of course, this is widely known and often offered up as a compelling reason to buy the stock.  However, it is only now that this claim appears to be obtaining some “street cred.” 

Earlier this year, BofA shot up to about $9.55, only to fall back to about $7.35 barely a couple of months later.  The recent gains have been more gradual and appear to be better sustained.  The current P/E is below 10 and appears to be fair for a bank, and the fact that the assets are increasing means that a healthier P/E is justified down the road.

From an investor’s perspective, it helps that one can place a bet on this stock alongside Warren Buffett, who made a $5 billion investment in 2011.  Although his investment was largely in Preferred Stock, along with warrants for 700 million shares of common stock at a strike price of $7.14, it still represents substantial faith in the future of this company.  More recently, BofA’s CEO boasted about his bank’s “top capital” balance sheet, and hinted at higher dividends down the road (SEE LINK).  Obviously, higher dividends means there will be more buyers of the stock later on, and therefore more stock price appreciation.

It appears that BofA is in an attractive place right now and worth taking a second look.  I rate Bank of America a buy.

Dig Deeper

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malayappan has a position in Bank of America. The Motley Fool owns shares of 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.If you have questions about this post or the Fool’s blog network, click here for information.

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