Bank of America Corp (NYSE:BAC) delivered a strong earnings report April 18 with revenues, net income, noninterest income, and book value per share all up impressively year over year. CEO Brian Moynihan was singing the bank’s praises in its press release accompanying earnings. And yet … BAC stock is up less than 4% in the days since.
If Bank of America is making all the right moves, why aren’t investors more excited about its results? Heck, BofA shares gained more from the French election news (along with the rest of the banks) than from its home-run earnings.
This is especially baffling given that many think BAC stock is still undervalued versus its peers despite a nearly 60% gain over the past year.
BAC Stock Is Undervalued (But Does It Matter)?
“Despite the huge run in BAC stock, it still looks cheap compared to other too-big-too-fail American banks. At this point, excluding one-off costs, BAC is trading at a 15x price-to-earnings ratio, compared to a 21x peer median across the industry,” InvestorPlace contributor Ian Bezek wrote recently. “Perhaps more impressively, the bank is at 1.2x tangible book value, compared to 1.6x for U.S. banks as a whole and almost 2x for the largest capitalization ones in the United States.”
OK. Let’s assume that Bezek is spot-on. You could buy BAC stock and still capture some gains over the next six to 12 months.
However, I wouldn’t recommend it be your only bank stock given there are better proxies for the U.S. banking industry, such as JPMorgan Chase & Co. (NYSE:JPM).
Not to mention the bull market is in its ninth year — a feat accomplished only one other time between October 1990 and March 2000. Do you remember how that one ended? Not well.
If you want to buy BAC stock, don’t. Buy these two stocks instead.
Berkshire Hathaway (BRK.B)
Bezek’s argument for buying BAC stock includes the fact Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett is likely to exercise the company’s warrant to buy 700 million shares of BAC stock for $5 billion ($7.14 per share). The option came with his 2011 preferred share investment of $5 billion.
Interestingly, while Buffett is up on Bank of America, he seems down on Wells Fargo & Co (NYSE:WFC) selling as many as 9.1 million shares of the beleaguered bank.
Berkshire Hathaway is a great stock. It offers diversification, large amounts of cash, a strong track record of performance and a partnership with 3G Capital that could turn out to be Buffett’s best move yet when all is said and done.
Buying BAC stock indirectly in this manner is the wiser course of action at this point in the bull market. Discretion is the better part of valor.
A Bank-Related ETF
With Berkshire Hathaway, you cover off your desire to own BAC stock.
It’s possible, however, that you are also bullish on banks in general. If that’s the case, it makes sense also to buy an ETF that owns Bank of America as well as other financial institutions.
Which one should you buy? I’d factor in three things: BofA’s weighting (high as possible), expense ratio (low as possible), and the number of holdings in ETF (few as possible to avoid diworsification); listed in order of importance.
That makes this choice an easy one.
I’d go with the PowerShares KBW Bank Portfolio (NASDAQ:KBWB). It’s five years old, has $808 million in net assets, charges 0.35% annually, owns just 24 stocks, and most importantly, a BAC weighting of 8.02% — the fund’s third-largest holding behind JPM and Citigroup Inc (NYSE:C).
There’s a lot to like about BAC, but I believe you’re smarter to follow this two-pronged approach to owning its stock at this stage of the game than going it alone.
Always protect your capital. This achieves that and then some.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.