What Does Billionaire Ken Fisher See In Bank of America Corp (BAC)?

With the first several weeks of a quarter, hedge funds and other major investors such as billionaire Ken Fisher’s Fisher Asset Management are required to publish 13F filings revealing many of their holdings as of the end of the previous quarter. Fisher’s firm has done its homework early and already released its positions for the end of June. We maintain a database of quarterly filings as part of our work researching investment strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and can see from comparing Fisher’s most recent filing to its previous one that the fund moved heavily into Bank of America Corp (NYSE:BAC) during Q2. It owned close to 22 million shares, up from 1.4 million shares at the beginning of April.

Bank of America Corp (NYSE:BAC) had joined peers Citigroup Inc. (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM) in our list of the most popular stocks among hedge funds for the first quarter of 2012 (check out the full top ten list). The bank had been the largest position in Platinum Asset Management’s portfolio at the end of Q1; that fund is managed by billionaire Kerr Neilson (find Neilson’s favorite stocks). Billionaire John Paulson’s Paulson & Co. had also owned a significant stake in Bank of America, reporting a position of more than 27 million shares in its own 13F (see Paulson’s stock picks).

In the second quarter of 2013, Bank of America Corp (NYSE:BAC)’s net income grew over 60% versus a year earlier. This was fueled by an increase in net interest income and successful cost cutting even as noninterest income declined slightly compared to the prior year period. The good results from Q2 brought earnings per share to 42 cents year to date. Wall Street analysts expect the company to deliver a slightly higher pace of earnings for the rest of the year, projecting 92 cents of EPS for 2013; that figure implies a current-year P/E of 16, which is quite a bit above the trailing earnings multiples of many other large banks. However, while the stock price has doubled in the last year as markets have become more confident in megabanks generally, Bank of America Corp (NYSE:BAC) is still valued at a considerable discount to book with a P/B ratio of 0.7. Analysts expect earnings to continue to improve next year and as a result the forward P/E is 11.

As we’ve mentioned Citigroup and JPMorgan Chase make good peers for Bank of America. In terms of forward earnings numbers, these two banks trade at small discounts with P/E multiples of 10 and 9 respectively; that figure is actually JPMorgan Chase’s trailing P/E as well as its business is further along the recovery process than the other two banks. Citi is also notable for trading below the book value of its equity, at a P/B of 0.8, while JPMorgan Chase is valued at a small premium. These two banks have also reported their results for last quarter, with earnings rising at least 30% compared to the second quarter of 2012 in each case.

We can also compare Bank of America Corp (NYSE:BAC) to Wells Fargo & Co (NYSE:WFC) and to Morgan Stanley (NYSE:MS), though the latter is more of a pure play investment bank. Wells Fargo is valued at 1.5 times book, reflecting a significant premium placed on its assets, but at least so far the company has been able to monetize them well enough that it is competitive with its peers at a trailing P/E of 12. It has also been improving its bottom line, though to a lesser degree then the three banks we’ve discussed as it had less of a decline to recover from. Morgan Stanley’s profits are low on a trailing basis, but the sell-side believes that it will do well enough over the next year that the forward earnings multiple (of 11) is even with these peers. We would note that the stock’s beta is 2.5, making it even more sensitive to the broader economy than the megabanks (which generally feature betas close to 2, or 1.1 in the case of Wells Fargo).

Fisher already had significant positions in Wells Fargo and JPMorgan Chase, but made this big buy in Bank of America Corp (NYSE:BAC) last quarter as well. The stock has certainly done well recently as costs have been reduced, and still trades at a discount to book, but we think that JPMorgan Chase or Citigroup might be more interesting names among megabanks.

Disclosure: I own no shares of any stocks mentioned in this article.