Bank of America: Screaming Bargain Or Just Another Value Trap?
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On Fridays, I embrace the adage that “a picture is worth a thousand words.” And I put the pen aside and try to let the graphics do most of the talking.
All it takes is a quick glance and you’ll be up to speed.
This week, I’m focusing on a single stock – one that’s gotten absolutely throttled in recent trading activity – to try to discern if it’s now a screaming bargain… or nothing but a value trap.
So let’s get to it…
Lions, Tigers and Bank of America Shares, Oh My!
On Tuesday, shares of Bank of America (NYSE: BAC) plumbed a new 52-week low at $6.01.
And that put shares down a staggering 56.61% for the year. Keep in mind, the average U.S. bank stock is only down about 26%, according to Morningstar data.
We’re certainly not living through the same conditions we experienced in 2008 and 2009. But Bank of America shares are darn near close to returning to their financial crisis lows. Take a look.
So what gives? Simply put, the residential real estate market. It’s still in the dumps. And Bank of America originated over $2 trillion in mortgages during the housing boom, most of which have turned sour.
Clearly, analysts and investors are worried that the bank might not be able to cover all the real estate losses. And they fear the company is going to need to raise additional capital, or worse, file for bankruptcy.
These aren’t idle fears, either. Not when the price to insure Bank of America’s bonds is spiking. It turns out that five-year credit default swap (CDS) prices are closing in on their financial crisis highs of 395 basis points.
Now, if we only looked at the stock chart and the CDS chart, it’d be easy to conclude that Bank of America is doomed! But don’t make that mistake. Because a chart of the company’s price-to-book ratio paints a very different picture.
As long as we can trust that the company’s stated book value is accurate, the stock’s dirt cheap. It’s trading at a price-to-book ratio of just 0.32, compared to 2.1 for the average stock in the S&P 500.
So which is it? Is Bank of America a value trap destined for the trash heap? Or a screaming bargain? All we have to do is ask this guy…
He just plunked down $5 billion yesterday to buy preferred stock in Bank of America.
I don’t know about you, but I don’t make it a habit to bet against Warren Buffett. This is no exception. Based on his latest move, I’d have to say that Bank of America represents a screaming bargain for long-term investors.
But let us know what you think about Bank of America – or any of our work at Wall Street Daily. You can either send feedback or post a comment below.
Ahead of the tape,