Is Bank of America Headed to $15 a Share?
On a day when the financial sector, and banks in particular, are trading lower, shares of Bank of America are continuing their impressive post-stress test rally, up more than 1% roughly two hours before the market closes. By all appearances, the afterglow of last week's $5 billion share buyback announcement and positive news out of the housing sector today are helping the bank buck the Cyrpus-induced downtrend.
The tiny Mediterranean island of Cyprus is now in its fourth day of deliberations over how to raise an additional 5.8 billion euros to satisfy the conditions of its bailout by the eurozone and the International Monetary Fund. The most contentious issue concerns a proposed levy on bank deposits. On Saturday morning, the country's parliament tentatively agreed on legislation to this end. Under the terms of the draft bill, depositors with between 20,000 and 100,000 euros on deposit would pay a 6.75% rate, while those with more than 100,000 euros in the bank would pay 9.9%. Those with less than 20,000 euros would be spared the impact.
The reverberations from this news have been widespread, evidenced by the comprehensive coverage given to it by the mainstream financial media. Investors and analysts are principally concerned about the potential for contagion. The fear is that depositors throughout the European continent could begin moving their money to presumed safe havens lest their savings be effectively confiscated as well.
However, there's a legitimate argument that much of this concern -- and media coverage, for that matter -- is arguably misinformed. As my colleague Morgan Housel presciently discussed yesterday, the alternative would be for Cyprus to leave the eurozone and set up shop on its own, including reinstituting its former currency and presumably putting its printing presses into overdrive. "That would eventually cause inflation," Morgan notes. "How much? I don't know, let's say 6.75%. In that case, those with cash deposits in Cypriot banks would lose 6.75% of their money in real terms -- the same amount being directly confiscated on most deposits through the IMF bailout."
Thanks to these arguably misguided fears, financial stocks here at home have taken a turn for the worse since the news was made public. The KBW Bank Index is down by 1.4% compared to its Friday close. And all of the too-big-to-fail banks -- including JPMorgan Chase , Citigroup , and Wells Fargo -- are trading lower as well, even though all three of them got approval to increase the amount of capital that they return to shareholders last week -- to read all about this, click here.
The one exception to this trend is Bank of America, the nation's second largest bank by assets. As I mentioned above, shares of the nation's second largest bank by assets are more than 1% higher in afternoon trading. What gives?
The answer to this question is twofold. First, unlike JPMorgan and Wells Fargo, shares of B of A have consistently traded below tangible book value since the financial crisis. Thus, they have further upside potential in the face of good news. And second, unlike Citigroup, which got approval last week to return only $1.2 billion in capital to shareholders via stock buybacks -- all of which, by the way, will simply offset compensation-based stock grants -- B of A was given the go-ahead to repurchase $5 billion in common stock and an additional $5.5 billion in preferred stock.
The results fueled the conviction of analysts that were already bullish on the bank. For instance, on CNBC yesterday, noted analyst Meredith Whitney expressed her opinion that B of A's shares "could have another 20% upside at current levels," pricing the shares right around $15. And over the next 18 months, "the stock could be in the $20s," she said. "Very rarely do these big banks have both value catalysts and momentum," Whitney noted. "Bank of America had all of that."
It's for this reason, in turn, that B of A's shares, at least for the time being, have been able to sidestep an otherwise downbeat sentiment toward financial stocks today.
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The article Is Bank of America Headed to $15 a Share? originally appeared on Fool.com.John Maxfield owns shares of Bank of America. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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