This Just In: Upgrades and Downgrades -- B of A

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best ...
It's taken nearly two months, but it's starting to look like a consensus is forming, up on Wall Street, about the future of Bank of America (NYS: BAC) . And that future looks grim.

Since 2012 began, shares of B of A have run up nearly 50% in price. Last month, the analysts at Goldman Sachs (NYS: GS) called "shenanigans" on the stock, and declared its run was done. It wasn't. But 20% worth of additional gains later, a second analyst is turning against B of A this week: Citigroup (NYS: C) .

While admitting that this week's settlement of mortgage fraud claims was good news for B of A, and commending the bank for shoring up its "capital base," ending worries that B of A may be forced to hold a dilutive follow-on offering to raise cash, Citi argued yesterday that the story has now changed. Up until now, the rally at B of A has basically tracked the waning of worries over the bank's balance sheet. Now that B of A has moved away from death's door, though, Citi suggests that investors are going to start paying more attention to the banker's earnings -- and whether they justify the stock's price: "BAC's recent outperformance reflects the market's increased comfort with its capital position, but at these levels we believe investor focus will shift to earnings, which have been weak."

Battle of the bankers
All together now: "How weak are they?" Well, they're weak enough that when compared to their brother megabankers, this is how Bank of America now stacks up, from a traditional, earnings-based valuation perspective:

 

P/E

Growth Rate

Price-to-Book Value

B of A778.015.5%0.38
Goldman25.112.2%0.86
Morgan Stanley15.49.0%0.61
JP Morgan8.47.6%0.82
Citi8.69.8%0.53

P/E, P/B, and growth rate data courtesy of Yahoo! Finance; free cash flow from S&P Capital IQ. * NM -- Not measurable, or no data available.

How do these numbers stack up against what we saw when we last looked at B of A, last month? They're actually almost identical, except in two respects. First, each and every one of these bankers has gotten a bit more expensive over the past few weeks -- but B of A's valuation in particular has grown by leaps and bounds, rising from a staggering 707 times trailing earnings to an even more nosebleed-inducing 778 times.

While still the cheapest of the bunch from a P/B perspective, B of A is far and away the most expensive stock on the list if you're valuing the bankers according to the profits they produce. (And isn't that what we're supposed to be doing, as investors?)

B of A's P/E is anyone's guess
Granted, if analysts are right, B of A's heady P/E ratio is going to come down a bit this year, as the banker improves upon that single penny's worth of profit it reported earning in 2011. Problem is, if Citi's right, the P/E won't be falling as much as many investors think.

On average, the consensus on Wall Street is that B of A will earn $0.71 per share this year, knocking the stock's P/E ratio all the way down from three digits to just two -- 11 times earnings. Citi worries, though, that B of A is probably going to earn something closer to just five dimes this year, resulting in a P/E ratio nearly 50% higher -- 16 times.

Foolish final thought
Now here's the kicker: Whether you believe Bank of America will earn enough to win an 11 P/E or only a 16 P/E, either way, this would leave B of A right where it is today -- sitting at the top of the list of the most overvalued banking stocks. More expensive than Goldman Sachs with a forward P/E ratio of 8.5 times and more expensive than Morgan Stanley's 8.0 times. Pricier than JP Morgan at 7.0x forward earnings, and costlier than even Citigroup itself, at 6.8 times.

In short, today, B of A looks like the single-most-overpriced banking stock, and the one most likely to tumble back to Earth.

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At the time this article was published The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase, andMotley Fool newsletter serviceshave recommended buying shares of The Goldman Sachs Group, but Fool contributorRich Smithdoes not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 381 out of more than 180,000 members. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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