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Stocks: Four Banks That Remain Cheaply Valued


From the Buzz & Banter: Banks such as Bank of America continue to trade at cheap price-to-book ratios.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

At Festivus 2012, Minyanville contributors Scott Redler, Peter Prudden, and I were standing around catching up on life and discussing finance, and the topic of conversation eventually landed on Bank of America (NYSE:BAC). It was trading at around $10 at the time. Scott, being a wiser man than I was, said "that thing is going to $14." Peter chimes in with "$16," and I said "$18 within 18 months." At the time that meant gains of 40%, 60%, and 80%, respectively. Fast forward 15 months and Scott and Peter nailed it as I am watching my call basically come to fruition. I have spoken about this call countless times on Twitter and even a few times on the Buzz & Banter. This was probably my highest conviction long-term trade of the last several years. I have happily watched BofA climb steadily over the months (with a few bumps along the way). So now that all of these targets have basically been met, do we just sell and walk away? Or do we double down?

I like to fall back on Paul Tudor Jones quotes in times like this:

"Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum drawdown."

I also like:

"Don't be too concerned about where you got into a position. The only relevant question is whether you are bullish or bearish on the position that day."

What I mean here is, I need to look at this in the light of where we are today, not where we have been. So all that being said, lets run the analysis again.

The fundamentals scream it is cheap. Bank of America is still trading at a discount to book value, meaning Price/Book is less than one, and its actually close to 0.8. Cash flows are still strong, loan losses are coming down, liabilities are managed properly, trading profits are stabilizing, and they have reduced their reliance on Fed Funds. All of these things are healthy for the company going forward and should also reduce the uncertainties around their future. Let's not forget the history of bank pricing. Banks have historically been a buy at 1-1.5x Book value and you sell them them in the 2.5-3X book value zone. I fully recognize that we are still only 5 years away from staring over the cliff of the "impossible," but we are well away from it now. Banks should be returning to normal and historical pricing, meaning I continue to think we see BofA move much higher.

The fear of collapse is still prevalent, as even today, I had someone ask me "Aren't you concerned of another financial bubble?" This fear, particularly related to several banks, is overstated and overdiscounted. I can see BAC over $30 within the next 26 months, and within 3 years, I think it will have doubled again from this level. That means I still expect in excess of 30% per year out of it. Others that fit the mold are Citigroup (NYSE:C), Zions Bancorp (NYSE:ZION), and SunTrust Banks (NYSE:STI).

I am still a buyer of cheap banks, and that list is my prime candidates.

Twitter: @twistedmarkets
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