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Why I sold Bank of America before the earnings report

Stocks in this article: BAC

By David Levine

I have owned Bank of America (BAC) for quite some time in my personal account and for several months in the Aspect Large Cap Value portfolio on Covestor, but I recently sold my positions.

I did this because I originally bought the stock as a way to invest in a turnaround in U.S. housing, and Bank of America's balance sheet in general. While I wish I had some highly mathematical reason for selling now, it's really not that complicated - I feel that the company's stock price has reached a point where it has gone from undervalued to at least fully valued.

Any gains from this point should be based on Bank of America doing a superior job, and thereby being rewarded with a premium multiple. I don't really expect that. In fact, I have a choice in terms of where I put my own business accounts, and my money is at Chase. If any large bank would command a premium it would be Chase, and just walking into a typical branch makes it obvious.

Bank of America

BAC Chart

BAC data by YCharts

At least where I live, the Bank of America branches seem somewhat dingy compared to the Wells Fargo and Chase branches -so it leads me to believe that the CEO is not reinvesting in the business as much as he should. Furthermore, in my opinion, the brokerage side (Merrill Lynch) - is in a long term decline vs. more nimble competition such as Charles Schwab or other money management alternatives.

As far as I am concerned, businesses like Merrill Lynch are literally dying. Their better brokers are leaving to go independent, and existing brokers are retiring. Unfortunately, their customers are primarily older individuals who seem to value tradition more than value itself. I personally don't understand the value proposition of a company like Merrill Lynch which is why I left full service brokerage more than a decade ago. I just think that the model is broken.

Going back to Bank of America shares, lets assume that BAC's tangible book value is around $14 per share. So at this price of around $17, we are getting over 1x book, 18-19x 2013 earnings, maybe 14x next years earnings - more than fair in my opinion. Looking at the charts, we are just shy of a five-year high in the stock. If you look at the residential real estate market - which is a big part of what caused the distress in the balance sheet, prices have recovered nicely, and while there should be more to go, I think that the majority of the easy money has been made. While Bank of America may continue to turn around and shrink the balance sheet, and while it could reinstate a dividend in the next few quarters, I am just not excited enough about Bank of America to continue to hold it. Furthermore, I assume that the stock is running up in anticipation of what will probably be a good quarter. Which could mean that it will sell off on good news or bad. Bank of America is scheduled to report fourth-quarter financial results on Jan. 15.

While I will be the first to admit that my cash pile is growing, I am not about to own stocks just to "be in the market." What I would rather do is look at something else - or just sit on cash and wait for something interesting. As I have stated many times, I am not a bear, and in fact I believe that the market is going a lot higher. However, I feel that my primary focus is on picking good stocks at good prices, and when I can't do that, I am happy to sit in cash.

DISCLAIMER: The opinions provided above are those of the contributors and not necessarily those of Covestor. The investments discussed are held in client accounts as of December 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

 

David Levine

David Levine

I am a value-oriented investor and a former financial adviser for Prudential Securities. I left the industry in 2000 and

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