5 reasons why BofA is red hotMarch 6, 2014: 1:12 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
Have investors been listening to a lot of R.E.M. lately? Track 3 on the Document album (remember what albums are?) in particular.
It certainly seems that way. The market is loyal to the Bank of America. It's a sign of the times.
BofA (BAC) is by far the best-performing bank stock this year. Shares are up nearly 13% so far.
Its five largest rivals -- Citgroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), Morgan Stanley (MS) and Goldman Sachs (GS) -- are eating BofA CEO Brian Moynihan's dust. Citi and The Vampire Squid are down. Shares of Jamie Dimon's bank are flat. Morgan Stanley and Wells are each up less than 5%.
And BofA has trounced its peers over the past 12 months as well. Just look at how well it's done compared with the Financial Select Sector SPDR (XLF) exchange traded fund, which owns all six of these Too Big To Fail titans of Wall Street. as well as major insurers and regional banks.
Why are investors so enamored with BofA of late? Is the bank really, to paraphrase Mr. Michael Stipe & Co. again, improving its business acumen?
Amazingly enough, it looks like the worst really is finally over for BofA. The taint from its ill-fated Countrywide purchase and
bailout, I mean takeover, of Merrill Lynch, has pretty much disappeared. Here are 5 reasons why BofA is leading the market ... and may continue to do so.
1. Its earnings were better than other banks. BofA reported fourth-quarter profits and revenue in January that topped analysts' forecasts. Moynihan has aggressively cut costs since replacing Ken Lewis as CEO in 2010. But he has also steadied the ship. Moynihan noted in January that the bank's turnaround was led by its "core businesses."
To that end, profits surged in its consumer and business banking division. That's the unit that does boring stuff like make loans and take deposits. It's nice to see that BofA is doing more plain vanilla banking as opposed to betting on derivatives.
2. The sins of the financial crisis are mostly behind BofA. The bank had a lot of legal headaches over the past few years. It still needs to settle with the Federal Housing Finance Agency regarding allegations that it misled investors about the health of pre-financial crisis era mortgage-backed securities.
But Moynihan hinted that BofA could soon settle with FHFA, saying in January that "work remains on past issues." The bank also has set aside ample reserves for litigation expenses. So it is prepared for future legal payouts.
3. The stock is cheap. Despite the huge rally, BofA shares continue to trade at a discount to nearly all of its rivals. Many bank analysts look at book value as the preferred metric. It essentially measures what a company is worth when you subtract its liabilities from its assets ... in other words, what it would be worth if liquidated.
Most healthy banks trade for more than their book value. BofA still does not. It trades at about 0.8 times book. That's in line with Citi's valuation. But Morgan Stanley trades at book value. JPMorgan Chase and Goldman trade at 1.1 times book. And Wells Fargo, which hit an all-time high today and is arguably the healthiest of the big banks, trades at 1.6 times book.
Does BofA deserve a Wells-like premium? No. But it probably should trade at a higher valuation than Citi and be closer to its other peers. If you believe BofA should trade at or slightly above book value, its stock could go up another 20% to 30% from current levels.
4. Passing the stress test? The Fed will be releasing results of its annual stress tests later this month. If BofA does well, it's possible (but not guaranteed) that it will get approval to use more capital to reward shareholders.
Keep in mind that BofA now pays a puny dividend of a penny per quarter. That works out to an annual yield of 0.2%. JPMorgan Chase and Wells Fargo pay dividends that yield more than 2.5%.
BofA last requested a dividend increase in 2011. The Fed said no. It's not clear if the bank will ask for one this time around. But given that the bank's balance sheet is in better shape now than three years ago, there's a better chance of the Fed saying yes if BofA makes a request. That would be huge.
Let's face it. Bank stocks are now modern day utilities. They're highly regulated. They're not encouraged to engage in the risky behavior that got them into their colossal mess in 2008 in the first place ... but also made them momentum stocks before the crash. So a steady income stream from dividends is one of the main allures of bank stocks these days.
5. The Oracle of Omaha is a fan. You may have heard of this Warren Buffett guy. He loves big financial firms. Berkshire Hathaway (BRKB) owns big stakes in Wells and Goldman, as well as American Express (AXP) and U.S. Bancorp (USB).
And guess what? Buffett will eventually become a big BofA shareholder too. In his annual letter to Berkshire investors, released last Saturday, Buffett wrote that Berkshire has the right to buy 700 million shares of Bank of America before September 2021 for $5 billion.
"We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly," he wrote.
And now that Buffett is loyal to the Bank of America, it's hard to bet against it.
Reader Comment of the Week! All aboard! I tweeted on Wednesday about how Union Pacific (UNP), Norfolk Southern (NSC) and American Railcar Industries (ARII) were hitting all-time highs. I threatened to sing the theme song to "Dinosaur Train," a PBS show that Buzz Jr. (and I) enjoy.
Apparently I'm not the only one.
Hee-larious, Aaron! You are wittier than the Troodon conductor. Anyway, for those not in the know ... the King Cryolophosaurus character looks and sings like Elvis. The crest resembles a pompadour. As seen below. You're welcome.
And if you've made it this far, I salute you. Here's a live version of that R.E.M. song I mentioned in the lede: "Exhuming McCarthy." Enjoy.