Either Bank of America investors are walking away from cash or they predict a serious deterioration of the balance sheet. Yesterday BAC was trading just above $11 per share. Tangible book value is $15.62. A return to tangible book would be a gain of over 40%. Standard book value is $22.54. This fifty percent discount at $11 has one hundred percent upside, but only if that book value is solid. Do selling investors know something that buying investors don’t? We know this much at least, with all of the forced changes the banks are stronger than they were pre-crisis. Is that enough? Evidently, the market is winning the debate over price, as it always does, but only time will tell whether or not it is winning the debate over value.
“Tangible book value per share(F)
increased 8% to $15.62; book value per share increased 6% to $22.54” ~ https://www.sec.gov/Archives/edgar/data/70858/000007085816000118/bac-12312015ex991.htm& http://finance.yahoo.com/news/bank-america-reports-q4-15-115000276.html
With 40% upside to tangible book investors are running away
in a panic. This is like deciding not to buy a taxi and
its business for $100,000 because the cash flows and customer base are
questionable --- while there is $140,000
cash in the trunk. Either there is
a belief that that cash will no longer be there, for some reason, or this is a just pure panic.
There’s something very wrong here. Scratch the taxi ... take out the engine … as far as profitability
is concerned what difference would it make?
That $140,000 cash is still in the trunk of the taxi. If you buy it at
$100,000, you will still realize a 40% profit when you find a more appropriate
market. Wait for the calm ... that "what was I thinking" moment will come. What does a
“slow business” environment really matter when the growth is free and even the cash is sold at a discount? If there
is a fear that the suitcase of cash will not be there after you make your
purchase, then what is the rationale? Slow
growth … ? ... but the wager on growth costs nothing.