BofA: A Trump Winner?
11/23/2016 9:00 am EST
Bank of America (BAC) has risen sharply, while volume shows the biggest surge in buying pressure the stock has seen since the beginning of 2014. I think it's legit.
For one, Bank of America has been trading at a discount to tangible book value for years. Tangible book value is "bricks and mortar" valuation that simply seeks to put a monetary value on the buildings and other assets of a company.
I have recommend BAC before, largely due to the fact that it has been the most undervalued bank out there. But there's even more to it than that. It has to do with the Dodd-Frank banking regulation law.
Now, this law was passed to prevent banks from engaging in the type of behavior that helped bring about the financial crisis.
The law basically says that banks have to have more ready cash on hand (Tier 1 capital) and can't make their business all about trading risky assets, like mortgage-backed securities.
Dodd-Frank has long been a target of Republicans. They don't like it because they believe it restricts a bank's ability to make money.
And Republicans generally favor less regulation, and Dodd-Frank adds layers of compliance rules that banks have spent millions to understand and implement.
I've had a $24 target for BofA. At that level, the stock would trade at book value and at about a 25% premium to tangible book value. Both of these valuations seem reasonable.
Investors are buying the stock as fast as they can right now because not only are these valuations reasonable, but they are also realistic in the near future.