Before anyone gets too bent out of shape, let me state first off, this isn’t a Bank of America Corp (NYSE:BAC) attack piece, per se (though regular readers will know I’m bearish on B of A).
This article is meant to point out the dangers in general of owning shares in a company you don’t fully understand: the havoc any stock can wreak on your portfolio if you don’t know when to buy more, when to sell it all, or when to just sit quietly and do nothing.
Bank of America Corp (NYSE:BAC) is a good case in point primarily because — like its big-banking peers — it’s a sprawling leviathan with a complex business model that defies straightforward analysis even in the best of times, and the last few years have been anything but the best of times for many of America’s big banks.
To that end, here are three benchmarks to think about when looking at Bank of America Corp (NYSE:BAC) as a potential investment: a quick guide to knowing whether or not your money should be anywhere near the superbank’s shares.
The price-to-book ratio is way to evaluate any company, but is a favorite method for bank investors. P/B compares a stock’s market value to its book value, and gives you some notion of what the company would be worth if it went bankrupt and was put on the auction block tomorrow.
Bank of America Corp (NYSE:BAC)’s P/B is a staggeringly low 0.60. Some investors look at this and see a big green light, a potential bargain: “Hey, this bank is way undervalued. Let’s scoop a bunch of its stock up!” Other investors, like myself, see a flashing red light: “B of A’s P/B is low — too low. There must be something fundamentally wrong with the company. I’d better stay away.”
Even Citigroup (NYSE:C), a company with its own complicated operating model as well as a complicated past, has a P/B of 0.72. I own a few shares of Citigroup (NYSE:C) myself, so for me, 0.72 is low, but not frighteningly low.
2. Earnings reports
For the fourth quarter of 2012, B of A’s revenue shrank 20.7% year over year, along with its net income, which shrank 63.2%. For the same period, Wells Fargo (NYSE:WFC) grew its revenue by 8.1% and its net income by 23.9%. JPMorgan Chase (NYSE:JPM)‘s numbers were 19.2% and 52.7%, respectively.