Stock of the Week
Bank of America
NYSE Symbol: BAC
Price as of 9/3: $13.50
August is over, thank goodness. It ended up being the worst August since 2001 and the first down month for August in five years. The worst performing sector during the quarter was the financials as investors now fear a double dip recession. The featured stock of the week is a financial that declined 13% in August. The feature stock is Bank of America. Thanks to the government bailout, Bank of America and the other large banks survived the financial crisis. Bank of America was actually a well run bank until they bought troubled firms Countrywide Financial and Merrill Lynch. Since the March lows in 2009, the stock and the fundamentals for Bank of America and the rest of the financials have improved dramatically. The banks are no longer writing down bad loans. In fact they actually have been reducing reserves for bad loans which goes right to the bottom line. Unfortunately since touching $20 a share back in April, the stock has gone straight down. The valuation for Bank of America is cheap, but can remain cheap for some time. Some investors do not want to invest in financials which is understandable. But recent insider buying by a director and the CEO himself may give hope that Bank of America's stock has declined too far and deserves a higher valuation.
Back in July, Bank of America reported second quarter net income of 27 cents per share or $2.78 billion beating estimates by 5 cents. A year ago, the bank earned $2.42 billion, or 33 cents per share. Revenue totaled nearly $30 billion in the quarter, down 11 percent from a year ago. Despite the higher profits, investors took a dim view of the company's results. One concern for investors is how banks will make money going forward amid lower trading profits, weak loan demand and tighter federal oversight following the passage of the sweeping financial overhaul legislation. Revenue in the company's trading business, which includes the Merrill Lynch operation, fell 42 percent from a year ago to $6 billion because of the steep dive the stock market took during the spring. Citigroup and JPMorgan Chase reported a similar slump in trading income. Both Bank of America and JPMorgan added money to their reserves against loan losses loans during the second quarter, but the amounts fell sharply. That means fewer Americans are falling behind on their loans for homes, credit cards and other items. Regarding the economy, the CEO stated they expect economic growth at an annual rate of 2.5 percent in the second half of the year and therefore not in the camp of a double dip recession.
The business environment is not ideal for banks, but it certainly doesn't seem to be as bad as investors or the stock would indicate. The valuation for Bank of America is cheap. Currently the stock is trading for 14 times reduced 2010 earnings and 8 times reduced earnings for 2011. The stock also trades for 1.8 times sales and 0.62 times book value which is $21.45 a share and just above its' tangible book value of $10.32. The hedge funds loved Bank of America last year, but sold out of most of their positions in the second quarter. A number of hedge funds switched to Citigroup due to their exposure overseas where the economies seem to be acting much better. The insider buying in Bank of America, totaling half million dollars, in the last several weeks hopefully a good sign for what's to come.