Why Bank of America (or Any Financial Stock) May Be Your Best Buy Now

by Jeff Reeves | June 16, 2011 3:37 am

Why Bank of America (or Any Financial Stock) May Be Your Best Buy Now

Top10icontext1 Why Bank of America (or Any Financial Stock) May Be Your Best Buy Now[1]Yes, my decision to buy Bank of America (NYSE: BAC[2]) on December 31 officially makes me the biggest loser on the InvestorPlace.com Top 10 Stocks for 2011 [3]buy list so far this year. But I refuse to panic and sell BAC. I still believe in Bank of America, and I am debating buying even more shares of BAC stock as the financial sector continues to move lower.

The definition of insanity, at least according to Albert Einstein’s famous quote, is doing the same thing over and over again and expecting different results. So does doubling down on Bank of America stock make me insane? Or does buying BAC make me crazy like a fox?

The brutal reality is that the entire financial sector is hurting big-time. After a 10-to-1 reverse stock split, Citigroup (NYSE: C[4]) is off -20% so far in 2011. Bank of America (NYSE: BAC[2]) and Goldman Sachs (NYSE: GS[5]) are both also off about -20%. Wells Fargo (NYSE: WFC[6]) is off -15% so far in 2011, while the “best” performing major bank is JPMorgan Chase (NYSE: JPM[7]) with -5% declines since January 1.

This movement across the whole financial sector is worth noting, since I bought BAC stock at $13.34 (it’s currently around $10.50) based on the idea that financial stocks in general would bounce back. In my original article touting BofA stock[8], my key reasons to buy in were:

Now that we’re halfway through the year, it’s worth noting the progress –- or lack of progress –- made on each of those key issues.

Things Getting Worse: Well, we have found out the Fed is putting the kibosh on a dividend boost (more on this later) and its Merrill Lynch unit is being investigated by the SEC for possibly mispricing assets in a $1.5 billion CDO. But on the whole, it appears that most of the “bad” news from BAC lately has been more of the same. Revenue is unimpressive, but no new problems have cropped up. So while shares of BofA have slid dramatically in 2011, I still consider this point to largely hold up.

‘Expert’ Targets: Things have changed a bit on this front. On one hand, the most recent analyst price target for BAC stock is $13.50  — set by UBS in May, with a rating of “neutral.” That gets me back to square and a little more, but not much. Before that was a target of $15 set in March by FBR, with a rating of “market perform.” But while the median price targets for Bank of America is admittedly off of the $18 mark I was tracking in January, it’s still at a respectable $16.50 with a mean target of $17.22 (according to 25 brokers surveyed by Thomson/First Call). That’s a 25% to 30% gain from my original buy-in to those levels –- and a 65% to 70% gain for those who buy in around $10. What’s more, as I pointed out in my recent column on 5 reasons to buy bank stocks[9], Warren Buffet is investing strongly in the financial sector. Berkshire Hathaway (NYSE:BRK.A[10], BRK.B[11]) boosted its position in Wells Fargo (NYSE: WFC[6]) again in its latest filings, to about 359 million shares from 342 million shares the previous quarter. And Berkshire owns 5.7 million shares of Wesco Financial Corp. (NYSE: WSC[12]) and is trying to acquire the rest of the company. All this shows the smart money still really believes in bank stocks.

Bigger Dividends: While some stocks boosted their quarterly payouts significantly –- JPMorgan Chase upped its payout from 5 cents to 25 cents a share, giving it a current yield of almost 2.5% —  the Fed frowned on Bank of America’s dividend proposal in March and refused to let it give more cash back to shareholders. That made already skittish investors even more worried about the balance sheet of this company. But I’m still expecting the pathetic one penny dividend to be increased in the next few months. That means I still believe in this reason to buy. Of course, I must admit CEO Brian Moynihan’s painful quote after BofA’s April earnings report worried me. Specifically, the Bank of America exec referred to the prospects of a dividend boostin the second quarter, third quarter, fourth quarter, first quarter, whatever — next year, this year” and that kind of hedging is worrisome. But I’m still hopeful.

Value, Not Growth: The first quarter of earnings in 2011 sure proved me wrong. S&P 500 corporations posted about 19% earnings growth year-over-year based on Q1 numbers. But I remain convinced that this momentum can’t keep up. Many of the gains from layoffs, productivity increases and acquisitions are now priced into the bottom line. Aside from a handful of booming companies like Apple Inc. (NASDAQ: AAPL[13]), I just don’t think that amid such weak spending and high gas prices that we will see significant growth for most companies. And if you’re looking for value, you’d be hard pressed to find better bargains than financials. Most banks are trading at about 9.4 times earnings, according to FactSet Research. BAC is the cheapest of the bunch with a forward P/E of around 6.6. Of course, you can argue that accounting fictions and the slippery nature of price-to-earnings ratios make these figures meaningless. But if you’re looking for value, you have to admit that the prospect of oversold bank stocks is an enticing one.

Economic Recovery: You can throw around all the numbers you want about foreclosure rates and 9.1% unemployment based on May numbers, but the bottom line is that we are slowly pulling out of the recession. We have added one million new jobs in six months — a small portion of what we need to recover, but significant progress. As just pointed out, corporations are very profitable and many companies are actually trading above 2007 levels despite the recent market trouble. And with regard to financials, while revenue remains sluggish it’s worth noting that Bank of America and others all drew down their cash reserves significantly recently — a sign that they are less concerned with offsetting losses and more concerned with freeing up cash to grow. In short, things are still looking up. We admittedly have a long way to go, but the signs of slow but steady improvement are there. And as the economy mends, financial stocks will rise in kind.

So, there you have it. Most of my reasons remain very sound, and the others still have a chance of being on target by the end of the year. And before I ever sell a stock, I ask myself “If I didn’t own shares at all, would I buy it now at these levels or invest elsewhere?” My answer for Bank of America is that I would assuredly buy. My feelings on this are so strong that I am thinking of doubling down on BAC stock.

The only disclaimer I will add is that my Bank of America buy is made with $1,000 of “play money” and is not a retirement investment. Financial stocks are clearly volatile right now, so only aggressive investors should consider buying into this sector.

But if you have a long-term horizon and can stomach the wild ride, consider buying into BAC stock. I think after bottoming out at a new low, the ride back up could be pretty impressive.

Check out the other FREE stock picks that make up InvestorPlace.com’s Top 10 Stocks for 2011.[14]

As of this writing, Jeff Reeves owned a long position in Bank of America stock. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.


Endnotes:
  1. [Image]: http://investorplace.com/best-stocks-for-2011/
  2. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  3. Top 10 Stocks for 2011 : http://investorplace.com/best-stocks-for-2011/
  4. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  5. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS
  6. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC
  7. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  8. my original article touting BofA stock: http://investorplace.com/http://investorplace.com/http://investorplace.com/http://investorplace.com/http://investorplace.com/26037/bank-of-america-nyse-bac-best-stock-to-buy-2011/
  9. 5 reasons to buy bank stocks: http://investorplace.com/http://investorplace.com/http://investorplace.com/http://investorplace.com/http://investorplace.com/44558/why-bank-stocks-are-a-buy-bac-c-wfc-jpm-gs-bk-axp-wsc/
  10. BRK.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.A
  11. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  12. WSC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WSC
  13. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  14. Top 10 Stocks for 2011.: http://investorplace.com/best-stocks-for-2011/?cp=msn&cc=synd

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