Bank of America Corp (NYSE:BAC) Board member David Yost directly purchased 20,000 shares of the company’s stock on January 24th at an average price of $11.53, according to a filing with the SEC. This nearly doubled Yost’s holdings of the stock; he had last bought shares in early November at prices of about $9.50. See a history of Yost’s insider purchases at Bank of America and at other companies. We track insider purchases because studies show that they tend to be bullish signals (read more about studies on insider trading). We think that this is because company insiders have to be more confident than usual that the stock price will rise in order to overcome the benefits of diversification. Yost is buying the stock on the strength of a rally- the stock is up 58% in the last year.
The bank has already reported its results for the fourth quarter of 2012, with performance not being particularly good. Revenue was down 25% from the same period in 2011, and earnings fell 63%. However, Bank of America Corp does get attention in the financial community for some attractive valuation metrics. The stock trades at a significant discount to book value- the P/B ratio is only 0.6- and while recent financials have not been impressive Wall Street analysts have the stock trading at 12 times this year’s earnings and a forward P/E of 9. The five-year PEG ratio is 0.6 as the sell-side actually considers Bank of America undervalued on an earnings basis.
Bank of America Corp was one of the most popular stocks among hedge funds in the third quarter of 2012 (see the full top ten list). Billionaire John Paulson sold some of his shares during the quarter but still reported a position of 28 million shares at the end of September (check out Paulson’s stock picks). Platinum Asset Management, managed by billionaire Kerr Neilson, owned a little over 35 million shares and this made Bank of America one of that fund’s largest 13F holdings (find more of Neilson’s favorite stocks). Bruce Berkowitz’s Fairholme had over $900 million invested in the stock.
However, other large banks look like better investments:
Bank of America has the heaviest discount to the book value of its equity among the major U.S. banks, though Citigroup Inc. (NYSE:C) and PNC Financial Services (NYSE:PNC) boast P/B ratios of 0.6 and 0.7 respectively. Forward P/E multiples (for 2014) at these two banks are 8 and 9 respectively, however, so Bank of America does not have any particular advantage in terms of value unless it turns out to beat analyst expectations more than these two companies do. In addition, net income has actually been up at Citi and PNC from a year ago, and so they look like better places to start looking for a cheap bank.
JPMorgan Chase & Co. (NYSE:JPM) is priced right at its book value, while Wells Fargo & Company (NYSE:WFC) actually trades at a moderate premium. This is because investors have more trust in these banks’ assets, and also because their recent financial performance has been superior to that at Bank of America. Earnings growth in the fourth quarter of 2012 versus a year earlier was at least 20% in each case, and trailing earnings multiples area in the 9-10 range with little- but still positive- growth expected in the future. In book terms JPMorgan Chase and Wells Fargo are valued at a premium to Citi and PNC, but they are still cheap and if an investor has more confidence in these banks they may be better buys.
We wouldn’t say that Bank of America is necessarily overvalued, but we’d advise investors to steer clear of this insider purchase anyway. The company’s peers seem to be about as cheap- and actually there is no gap at all when we value them using earnings rather than asset-based metrics- and their businesses have clearly been doing better recently. Any other big American bank seems to be a better prospect for value.
Disclosure: I own no shares in any stocks mentioned in this article.
