Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

Is Bank of America Stock a Buy Right Now for Value Investors?

Going into the financial crisis, the bank industry was fertile territory for growth investors, who sought to ride the consolidation wave that resulted in Bank of America (NYSE: BAC) and other banks amassing trillions of dollars in assets on their balance sheets. But since then, things have changed, as low interest rates and higher compliance costs have caused growth investors to stay on the sidelines, leaving the space to value investors.

With this in mind, it's worth looking at whether a bank like Bank of America, which grew rapidly before the crisis, is cheap enough to attract value investors in the crisis' wake.

Image source: The Motley Fool.

The most common metric used to assess this is the price-to-book value ratio. This compares a bank's stock price to its book value per share -- i.e., its shareholders' equity divided by its outstanding share count.

Generally speaking, banks are considered cheap when their shares trade for a discount to book value. Alternatively, banks tend to be considered expensive if they trade for two or more times book value.

In Bank of America's case, its shares are currently priced at $24.96 per share, as of Monday's closing price. Its book value per share is $24.88. Thus, its price-to-book-value ratio comes out to just above 1.0. This suggests that Bank of America's stock is neither cheap nor expensive, but rather right between the two.

You can get more context into Bank of America's valuation by comparing it to other big bank stocks. To this end, the average bank on the KBW Bank Index, which tracks shares of two dozen large cap banks, trades for 1.49 times book value, according to YCharts.com.

The most expensive stock on the index, First Republic Bank, trades for 2.6 times book. The cheapest, Capital One Financial, trades for 0.84 times book value -- that is, at an 16% discount to book value. Aside from Capital One and Citigroup, in fact, Bank of America's shares are priced at the lowest multiple to book value of any bank on the KBW Bank Index.

Image source: Bank of America.

There are multiple reasons for this. One is that Bank of America's profitability is below the average among large cap bank stocks. Its return on equity over the past 12 months was 8.12%. That's below the 10% rate that analysts and investors typically expect from a bank the size of Bank of America. It's also below the 9.47% average on the KBW Bank Index.

Another reason that Bank of America's shares trade for less than the average of other large cap banks is because it can't grow as quickly. Given that it already holds 10% of domestic deposits, it's legally prohibited from acquiring other banks. This leaves organic growth as the sole means for Bank of America to get bigger. Only two other banks are in this same boat: JPMorgan Chase and Wells Fargo, the first- and third-biggest banks by assets in the country, respectively.

Consequently, while Bank of America's shares may seem cheap relative to other bank stocks, there are reasons for why this is the case. This doesn't mean investors should avoid the Charlotte, North Carolina-based bank's stock, but it does imply that it isn't the screaming bargain that most value investors are on the hunt for.

10 stocks we like better than Bank of America
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Bank of America wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.