Why? Analysts had estimated the company would produce earnings of $0.22 per share and the result on a per-share basis was $0.20.
If we refer to my earlier articles outlining a bullish case for Bank of America Corp (NYSE:BAC), you’ll recall that I said
Consider that even if its earnings don’t grow and Bank of America is gradually repriced to a book value of 1, its share price will see $20. For me, I am quite happy to hold Bank of America Corp (NYSE:BAC) for the next few years with the possibility of a 75% gain.
This view still holds true. I don’t believe it matters at all that in recent days the stock pulled back 4.5%. Year-to-date, the stock is up more than 35%. An overreaction to earnings (which still grew nicely) is not for me a basis to sell a long-term position.
The price-to-book valuation is still offering exceptional long-term value at the current measure of 0.6. If you look at the chart of Bank of America, this most recent move looks like nothing more than ‘noise’ in an otherwise nice uptrend.
A similar thing happened to Citigroup Inc. (NYSE:C). The company only just came out with its first quarter results showing a solid 30% increase in profits, yet the stock fell 2% in response to that performance. Take a look at the graph of Citigroup over the last 12 months. Does a 2% downward move look like anything more than random noise?
Maintain a rational perspective
It’s important to remember as long-term investors to be mindful of not getting caught up in the noise and hoopla of the popular press and traders. The mood of the market can swing wildly. One moment endless optimism abounds, and the very next it is unending pessimism. This is the not the mindset to make sound, rational investment decisions in.
Citigroup Inc. (NYSE:C) improved its net income and interest margins, decreased its net credit losses, and improved its Basel 1 Tier capital position. It’s difficult to surmise how with just recently announcing its results that the stock should be sold off by 2%. This to me offers a good potential buying opportunity for those who have wanted to acquire stock in Citigroup Inc. (NYSE:C) yet were waiting to see the first quarter results.
Take a step back – evaluate the companies for the underlying business results they are producing and reporting. Use this as your guide to form your investment decisions on, not the whimsical reactions of a stressed and neurotic market. If anything these wild reactions might well be used to your advantage.
Think of Buffett – does he make his long term purchases by making sure the broader market is agreeing with him? I don’t think so. Buffett is famous for being greedy when others are fearful.
American International Group Inc (NYSE:AIG)
American International Group Inc (NYSE:AIG) is another long-term position I hold. I am bullish AIG for similar reasons to Bank of America and Citigroup. They are all trading at sizable discounts as measured by their price-to-book values. AIG currently has a price to book of just 0.6 and forward P/E of under 10.
My suspicion is the 2.5% decline that American International Group Inc (NYSE:AIG) recently experienced has nothing to do with the underlying performance of AIG’s business operations, but is rather a side effect of the bigger decline of Bank of America.
I am continuing to hold my position in AIG as I believe it’s fundamentals are still sound and it is still offering great value as judged by its low price-to-book value. If we look at a chart of AIG, we can see downward movements of 2% to 3% are not out-of-character behaviors and might well be interpreted as just noise.
Time heals all wounds (eventually)
If you were to survey the general investing public you would likely find that the vast majority are not investing in large cap banks, such as the three companies above. There is quite a strong disdain (as judged by media reporting from non-financial media) for mega banks. On the surface, this might appear to be a bearish sign. However, it is important to understand the market structure and market psychology, as these two factors will enormously impact the future share price performance.
If the great majority of people are not invested in a stock, say Citigroup for example, then this means there is a larger pool of potential buyers to come and bid up the price of Citigroup should the mood shift. This may seem like a somewhat vague statement, but it is critical to grasp.
In the boom days of 2007, the general investing sentiment toward large-cap banks was buoyant and positive. Great numbers of people were investing and making what seemed like easy money. Investors need to realize, if the great majority are singing the praises of a stock and are for all intents and purposes fully invested, then who is left to push the price higher? (Think of Apple – a great cash producing business, yet has seen it’s stock price fall from $700 to $400.) Times have since changed. The mood of the general market is significantly less positive towards large cap banks.
Opportunity
This presents a great opportunity for potential investors in these three stocks. While investor sentiment is still negative, these three banks continue to improve their businesses and quality of earnings. They have written down large amounts of bad debt and losses, they have recapitalized and reinvented themselves in a post-GFC world. Profits are generally growing and balance sheets are improving in their quality.
Traders are hares; will you be the turtle (who wins)?
Remember as a long-term investor to base your buying and selling decisions on what the long-term prospects of the underlying business are. If you combine this with buying when the stock is out of favor with the market, you stand to pick up shares in great businesses at a discount.
Let the short-term traders worry about the small moves. I am holding Bank of America Corp (NYSE:BAC) and am prepared to do so with the view of realizing a gain of $8 (from an entry of just under $12), whipsaw movements of a couple of percentage points are not of interest to me as a long-term investor. It might well pay to ask yourself this — are you holding your positions as an investor or as a trader merely dressed in investor clothing?
The article Bank of America – Seeing the Forest From the Trees originally appeared on Fool.com and is written by Jarrod Bailey.
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