Why Bank of America Could Be the Dow's Biggest Winner in 2012

It's no secret that last year was brutal for banking. None of America's biggest banks left 2011 unscathed:

Bank

2011 Stock-Price Change

Wells Fargo (NYS: WFC) -11.1%
JPMorgan Chase (NYS: JPM) -21.6%
Citigroup (NYS: C) -44.4%
Morgan Stanley-44.4%
Goldman Sachs-46.2%
Bank of America (NYS: BAC) -58.3%

Source: S&P Capital IQ.

While Wells and JPMorgan managed to avoid meltdowns because of perceived quality, the rest were battered as investors feared what lurked in Wall Street operations. It's no coincidence that Wells is closest to a pure retail bank and it was the closest to breaking even.

Compare these returns to the Dow's (INDEX: ^DJI) 5.5% gain, and it's no surprise that Bank of America led the Dow's losers. JPMorgan, the only other bank in the Dow 30, was the fourth worst.

What's amazing to me is that I thought the banking sector, coming off its financial-crisis beatdown, was really cheap at the beginning of the year. In fact, back in November of 2010, the first two stocks I picked in the banking-centric real-money portfolio I run for the Motley Fool were Bank of America and JPMorgan.

Since that point in November, those two picks are down 42% and 3%. Take a look at the amazingly low price-to-book ratios of the biggest banks now.

 Bank

Price-to-Book Ratio

Wells Fargo1.2
JPMorgan Chase0.8
Citigroup0.5
Morgan Stanley0.6
Goldman Sachs0.8
Bank of America0.3

Wells may look high in comparison, but remember that it usually (justifiably) trades for premiums. It wasn't unusual to see Wells trading at 2 to 3 times book value in the past.

On the low end, Bank of America trades at just a third of book value. In the decade before the financial crisis, Bank of America never once traded at even book value.

So, bottom line, banking is certainly troubled. And critics will say that these are multiples on "supposed book value" because not even the best analyst really knows what all lurks on big banking's balance sheets. But if the book values the banks are reporting have even half the quality of what they claim, we could see the banking sector's shares recover impressively.

Bank of America is already leading the Dow's gainers in 2012, up almost 20% (off a very low base). We'll get more data when it reports fourth-quarter earnings on Jan. 19. That particular report may or may not be favorable, but don't be surprised if Bank of America goes from worst to first on the Dow this year. (Post-publication note: Bank of America basically met expectations when it reported. Due to strategic asset sales, it is now profitable on a trailing-12-month basis. Overall, I liked what I saw and I'm still bullish on Bank of America.)

I believe the banking sector as a whole is being undervalued because of uncertainty. But there is serious and unknowable risk in the biggest players. If Bank of America's opaque balance sheet isn't your cup of tea, let me point you to a smaller, simpler bank that has some of the best operational numbers I've ever seen. I wrote about it in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the bank I believe Warren Buffett would be interested in if he could still invest in small banks. Get access now.

At the time this article was published Anand Chokkavelu owns shares of Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo. He also owns warrants on JPMorgan Chase, Citigroup, and Wells Fargo and long-dated options on Bank of America. The Motley Fool owns shares of Citigroup, Bank of America, Wells Fargo, and JPMorgan and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Goldman Sachs. We Fools don't 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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Bob

The bad new from Bank of America's Countrywide loans never seems to stop. I think their numbers are meaningless, and wouldn't be surprised to see BAC, after already loosing almost 90% of its value, now go to zero.

January 16 2012 at 4:30 AM Report abuse rate up rate down Reply
konsyltacii economy

English:
One of the problems of the modern world, in my opinion, is that the financial sector with a large bureaucratic apparatus, that requires a lot of operating expenses, can not to ensure on acceptable terms the finance of real economy that produces real goods. Another problem is the lack of real mega projects, which can solve the key issues of modern society. The implementation of several mega-projects can significantly change the situation in the world. More than a ten very important mega-projects have already been developed, they are clear for investor intuitively with almost the first words. Simplicity of implement with minimal material resources and a huge economic effect from the implementation of these megaprojects - brand-handwriting and brand identity of the developer. About these megaprojects, possibly, will be written on the internet a more details, keyword konsyltacii.

Français:
Un des problèmes du monde moderne, à mon avis, est que le secteur financier avec un appareil de grande bureaucratie, qui exige beaucoup de dépenses d'exploitation, ne peut pas fournir des conditions acceptables le financement de l'économie réelle qui produit des réelle marchandises. Un autre problème est le manque de véritables mégaprojets, capable de résoudre les principaux problèmes de la société moderne. La mise en œuvre de plusieurs mégaprojets peuvent modifier considérablement la situation dans le monde. Plus de dix très importants mégaprojets ont déjà été développés, ils sont claires pour les investisseurs intuitivement avec pratiquement les premiers mots. Simplicité de mise en œuvre avec les ressources matérielles minimales et un énorme effet économique de la mise en œuvre de ces mégaprojets - c'est une marque personnelle du développeur. A propos de ces mégaprojets, éventuellement, sera écrit sur l'internet plus (mot-clé est konsyltacii).

Deutsch:
Eines von vielen Problemen der modernen Welt, meiner Meinung nach, besteht darin, dass der Finanzsektor mit einer großen Bürokratie und hohen Ausgaben im Zusammenhang mit diesem, kann keine Finanzierung zu akzeptablen Bedingungen die Realwirtschaft, die reale Waren produziert. Ein weiteres Problem ist der Mangel an echten Mega-Projekte, die wichtigste Fragen der modernen Gesellschaft lösen können. Die Verwirklichung einige Großprojekte können bedeutend die Situation in der Welt verändern. Über ein Dutzend sehr wichtiger Großprojekte sind schon ausgearbeitet, sie sind intuitiv dem Investor praktisch mit den ersten Worten klar. Die Einfachheit der Verwirklichung bei den minimalen materiellen Ressourcen und einen kolossalen wirtschaftlichen Effekt der Erfüllung dieser Mega-Projekte ist eigene Marke des Entwicklers. Von diesen Großprojekten wird vielleicht noch im Internet geschrieben (Suchbegriff ist konsyltacii).

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January 16 2012 at 2:22 AM Report abuse rate up rate down Reply