If You Hate Bank of America, Then Buy Its Stock!
Aug 18th 2013 3:20PM
Updated Aug 18th 2013 3:26PM
If Bank of America were a senior in high school, it wouldn't be selected as the most popular member of its graduating class. The most despised member, perhaps, though I don't recall seeing that designation as being officially sanctioned by the yearbook staff.
But for an investor, reputational damage like this offers a glaring opportunity. If your goal is to buy low and sell high, then you have to buck the crowd. "When 'conditions' are good, the forward-looking investor buys," notes Fred Schwed in his timeless classic Where Are the Customers' Yachts? "But when 'conditions' are good, stocks are high."
Take Wells Fargo and US Bancorp as examples. These are two of the best-run banks in the country. Everybody knows this. And as a result, they trade for a pretty penny. Wells Fargo's stock sells for 1.9 times tangible book value, while US Bancorp's goes for a staggering 2.9 times tangible book.
Can these valuations head higher? Sure, but absent some type of irrational bubble, it's hard to envision that either of them would double. There's simply a limit to how much investors will pay for even the best banks.
Bank of America, on the other hand, presents a case in contrast. At its closing price on Friday, it changed hands for 1.08 times tangible book value. This was second only among the top banks to Citigroup , which is priced slightly below tangible book value.
Now, to be fair, both of these banks come with significantly more risk attached to them than, say, Wells Fargo. For its part, Bank of America is currently embroiled in litigation over whether a New York judge will approve an $8.5 billion settlement dating back to the financial crisis. If it's not, then the nation's second largest bank could potentially be on the hook for significantly more liability.
And Bank of America also continues to be heavily weighed down by toxic mortgages. In 2011, the operational division that oversees these legacy "assets" recorded a pre-tax loss of $30.6 billion! And while that declined dramatically last year, it still added up to a pre-tax loss of $11.4 billion. Suffice it to say, this will wreak havoc on even the best bank's bottom line.
Citigroup, meanwhile, carries the effectively unquantifiable risk of being directly exposed to virtually every economy on the globe. On top of this, given that it relies to the least extent on domestic deposits, its funding base is far and away the most vulnerable to a liquidity crisis.
Nevertheless, in Bank of America's case at least, I remain a strong believer in the current management's ability to steer the bank through what's left of its unpleasant journey. While this will still take years to complete, they're well on the way. And while the stock has already rallied considerably since the darkest days in 2011, I believe there's a strong argument that it continues to offer the best risk-reward proposition among its too-big-to-fail brethren.
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The article If You Hate Bank of America, Then Buy Its Stock! originally appeared on Fool.com.John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo and owns shares of Bank of America, Citigroup, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. 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.