So far this year, Bank of America (NYSE: BAC) shares have plummeted nearly 30%, making it one of the worst-performing stocks on the Dow Jones Industrial Average.
While many claim the stock will continue to drop, I see a more bullish picture ahead.
In fact, I agree with my colleague, Jeff Reeves, who in his June 16 article, Why Bank of America (or Any Financial Stock) May Be Your Best Buy Now, suggested several reasons why BAC may be a potential buy at current levels.
In addition to Jeff�s insights, here are six more reasons why buying shares of America�s second largest bank �could put money �BAC� in your pockets:
1) Shedding of noncore assets
As a growth strategy, Bank of America aggressively pursued a number of mergers and acquisitions in years past.
Most notably, in 2008, the bank purchased mortgage lender Countrywide Financial for $4.1 billion. The deal was intended to expand BofA�s empire. But, in reality, it devastated the bank, making it incredibly vulnerable during the height of the housing bubble.
Coming to terms with this big mistake, BofA implemented a strategy to sell noncore assets, in order to increase capital, over time. On Monday, BofA announced plans to sell a portion of its holdings in China Construction Bank. BofA also recently spun off its last largest private equity firm, known now as North Cove Partners. And it recently sold its Balboa Insurance unit.
Last year, BofA sold 46.1 million shares of its stake in BlackRock (NYSE: BLK) and raised additional capital by completing the $1.9 billion sale of First Republic Bank.
BofA will likely to continue to strategically shed noncore assets in the years to come to improve capital and help strength its balance sheet, ultimately bringing better value to shareholders.
2) Slowly improving housing situat! ion
Through its Countrywide purchase � and the huge number of home foreclosures that followed � BofA unintentionally became one of the largest private home owners in the U.S. As a result, the bank is highly exposed to fluctuations in housing market.
While we are certainly not out of the woods yet, there are subtle signs the housing market may be slowly improving. This week, the Federal Housing Finance Agency reported that home prices increased 0.8% in April, their first rise in over a year. In addition, May existing home sales fell less than expected.
With BofA�s heavy exposure to the housing market, a lift in the housing sector could equally translate to a lift in Bank of America shares.
3) Bank of America is hiring
A growing company often needs to hire new employees. Available jobs, therefore, can be a way to casually gauge a company�s financial health. This week, BofA announced plans to hire over 500 so-called Financial Solution Advisors.
While many claim the stock will continue to drop, I see a more bullish picture ahead.
In fact, I agree with my colleague, Jeff Reeves, who in his June 16 article, Why Bank of America (or Any Financial Stock) May Be Your Best Buy Now, suggested several reasons why BAC may be a potential buy at current levels.
In addition to Jeff�s insights, here are six more reasons why buying shares of America�s second largest bank �could put money �BAC� in your pockets:
1) Shedding of noncore assets
As a growth strategy, Bank of America aggressively pursued a number of mergers and acquisitions in years past.
Most notably, in 2008, the bank purchased mortgage lender Countrywide Financial for $4.1 billion. The deal was intended to expand BofA�s empire. But, in reality, it devastated the bank, making it incredibly vulnerable during the height of the housing bubble.
Coming to terms with this big mistake, BofA implemented a strategy to sell noncore assets, in order to increase capital, over time. On Monday, BofA announced plans to sell a portion of its holdings in China Construction Bank. BofA also recently spun off its last largest private equity firm, known now as North Cove Partners. And it recently sold its Balboa Insurance unit.
Last year, BofA sold 46.1 million shares of its stake in BlackRock (NYSE: BLK) and raised additional capital by completing the $1.9 billion sale of First Republic Bank.
BofA will likely to continue to strategically shed noncore assets in the years to come to improve capital and help strength its balance sheet, ultimately bringing better value to shareholders.
2) Slowly improving housing situat! ion
Through its Countrywide purchase � and the huge number of home foreclosures that followed � BofA unintentionally became one of the largest private home owners in the U.S. As a result, the bank is highly exposed to fluctuations in housing market.
While we are certainly not out of the woods yet, there are subtle signs the housing market may be slowly improving. This week, the Federal Housing Finance Agency reported that home prices increased 0.8% in April, their first rise in over a year. In addition, May existing home sales fell less than expected.
With BofA�s heavy exposure to the housing market, a lift in the housing sector could equally translate to a lift in Bank of America shares.
3) Bank of America is hiring
A growing company often needs to hire new employees. Available jobs, therefore, can be a way to casually gauge a company�s financial health. This week, BofA announced plans to hire over 500 so-called Financial Solution Advisors.
With these hirings, the bank�s intention is to enhance relationships with �preferred customers� who have BofA assets worth between $50,000-$250,000. The move should improve customer service and may even attract new clients to the bank, potentially bringing in new capital.
4) Bullish technicals
You need not be an astute technical analyst to see that BAC�s chart has been in a steady downtrend all year. �As you can see on the chart below, shares toppled from a high of $15.29 in early January to a low of $10.40 in mid-June.
Coincident with this tumble, the 50-day moving average bearishly crossed below the sinking 200-day moving average, creating a bearish formation known as a �death cross�! .
However, BAC may have hit bottom. The stock appears to have found support around the $10.40 level. And over the past couple weeks, it has lifted off this support level. It now appears the stock is attempting to break the downtrend line — which acts as an important resistance point.
If BAC can challenge this downtrend line, it will shatter the bearish descending-triangle pattern. With enough momentum, the stock could feasibly climb back to its January $15.29 high. At the stock�s current price, traders could potentially see gains upward of 40%.
5) Solid fundamentals
The fundamentals also indicate moderate growth potential ahead.
Although analysts project 2011 revenue will drop 4% to $105.8 billion from $110.2 billion last year, the situation should slowly improve. By 2012, the 23 analysts following the company expect revenue will increase 5.1% to $111.2 billion.
The earnings outlook is also strong. Analysts expect 2011 earnings per share to increase to $1.06 from 86 cents last year. By 2012, earnings are projected to rise to $1.70 a share.
6) Fair valuation
At current levels, the stock is also fairly valued, based on its forward price-to-earnings (P/E) ratio of around 6.3 and price-to-book (P/B) ratio of about 0.5. In comparison, competing banks Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) have higher P/E ratios of around 7.4 and 7.2, respectively. They also have higher respective P/B ratios of about 0.7 and 0.9. Based on these metrics, BAC is slightly more attractive than its peers.
Given the six factors outlined above, BAC may be a buy at current levels. If the stock can break the downtrend line and the ensuing descending triangle pattern, the technicals suggest BAC could, well, give you a run for your money.
4) Bullish technicals
You need not be an astute technical analyst to see that BAC�s chart has been in a steady downtrend all year. �As you can see on the chart below, shares toppled from a high of $15.29 in early January to a low of $10.40 in mid-June.
Coincident with this tumble, the 50-day moving average bearishly crossed below the sinking 200-day moving average, creating a bearish formation known as a �death cross�! .
However, BAC may have hit bottom. The stock appears to have found support around the $10.40 level. And over the past couple weeks, it has lifted off this support level. It now appears the stock is attempting to break the downtrend line — which acts as an important resistance point.
If BAC can challenge this downtrend line, it will shatter the bearish descending-triangle pattern. With enough momentum, the stock could feasibly climb back to its January $15.29 high. At the stock�s current price, traders could potentially see gains upward of 40%.
5) Solid fundamentals
The fundamentals also indicate moderate growth potential ahead.
Although analysts project 2011 revenue will drop 4% to $105.8 billion from $110.2 billion last year, the situation should slowly improve. By 2012, the 23 analysts following the company expect revenue will increase 5.1% to $111.2 billion.
The earnings outlook is also strong. Analysts expect 2011 earnings per share to increase to $1.06 from 86 cents last year. By 2012, earnings are projected to rise to $1.70 a share.
6) Fair valuation
At current levels, the stock is also fairly valued, based on its forward price-to-earnings (P/E) ratio of around 6.3 and price-to-book (P/B) ratio of about 0.5. In comparison, competing banks Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) have higher P/E ratios of around 7.4 and 7.2, respectively. They also have higher respective P/B ratios of about 0.7 and 0.9. Based on these metrics, BAC is slightly more attractive than its peers.
Given the six factors outlined above, BAC may be a buy at current levels. If the stock can break the downtrend line and the ensuing descending triangle pattern, the technicals suggest BAC could, well, give you a run for your money.
