Last week, I spoke about Warren Buffett’s and Charlie Munger’s favourite and biggest stock holding Wells Fargo at Trader Planet.
I have identified another opportunity I’ve been loading up on as of late, Bank of America (BAC). Interestingly, it is also Charlie Munger’s second largest holding after Wells Fargo. He holds almost 30% of his portfolio in BAC.
Along with all banking stocks, Bank of America has fallen harder than many of its peers so the opportunity of an even larger capital gain is expected upon rebound. When will this happen? No idea, but you have a very high probability that it will happen.
Please note, I am both a long-term deep value investor as well as a medium-term trader who utilizes the combination of both fundamental and technical analysis to form a view of every investment I make. Doing so I believe leads to low risk and superior market beating returns over the long run.
Fundamental Factors;
The Bad
Earnings per Share growth (EPS) is forecasted to be weak.
Normalised Return on Equity (ROE) of just over 6% is a little low relative to it’s peers. Wells Fargo for example is over 12%.
The Good
Valuation of over $19.00 based on the equity multiple valuation model, so Bank of America is significantly undervalued (over 36%) at current prices, presenting a huge margin of safety available.
Price to Book Value of just 0.62, a significant discount to what it’s book value is.
Earnings per share growth has been excellent over the past five years.
The net interest rate margin difference it earns from its borrowers and depositors is over 3.12% and will likely increase as the FED raises rates over time.
Technical Factors;
The Bad
Clearly broken the $15 key price support level.
Currently below both 50 and 200 day moving averages.
The Good
The stock seems to be holding up at another key $13 price support level, a price not seen since mid 2013.
The stock is oversold on a variety of momentum indicators like the RSI.
Other Factors
For longer-term investments, I generally like to see who else is on-board with me and where the smart money has found its home. I am especially intrigued as Charlie Munger actually picked up BAC back in the third quarter of 2015 at a higher price, well above $14.50. In my opinion, actions always speak louder than words.
In this case, SEC filings report the following world-renowned deep value investors holding significant stakes in Bank of America.
Charlie Munger – 28.98% of portfolio managed
Bruce Berkowitz – 12.35% of portfolio managed
Guy Spier – 7.66% of portfolio managed
Conclusion
Bank of America (BAC) is a fundamentally strong major bank with a dominant banking operations across retail, business, institutions, corporations and governments and smart money support. It also has low exposure to the weakening energy sector but has been sold off like its lending portfolio is heavily involved in the energy sector.
I have just added more Bank of America into our long term investing portfolio as there has been a pick up in buying volume.
