Bank of America Has Gotten Expensive

NEW YORK (TheStreet) -- The last time I discussed Bank of America (BAC), I told you the stock was fairly priced. I didn't see the justification for more gains, even though I was willing to look at the glass-half-full side of the story.

Since then, however, the stock has shot up an additional 12% and breaking that all-important $15 mark last week.

Look, I'm not blaming Bank of America. Other than smiling and saying "thank you," there's not much a company can do when the Street falls in love with its stock. While Bank of America has certainly become a pleasant turnaround story, I can't say that the stock, which closed Wednesday at $14.60, makes sense at this level -- not at a P/E of 31, which is more than three times that of JPMorgan Chase ( JPM).

I'm not saying Bank of America's growth is not impressive. In fact, I've said on more than one occasion that the pace of Bank of America's recovery was faster than it had fallen. But I don't believe that investors who are enamored with Bank of America's notable growth truly appreciate the depths the bank had reached. To say it another way, the giant leaps are indeed remarkable. But it's also because Bank of America was so far behind.

What's more, when compared to the likes of Wells Fargo ( WFC), the deficits Bank of America still has to work with become more noticeable, including fee income, which was down 4% in the recent quarter due to lower trading. Granted, Bank of America's 6% growth in operating revenue was 5% better than Wells Fargo's, but the bank also posted a 1% sequential decline in net interest income.

I won't disagree that there are still plenty of legacy issues impacting upon Bank of America's performance. But the same explanation can't be used to justify the premium the stock price commands, not when net interest margin (NIM) and earnings assets are underperforming. What's more, it also looks as if JPMorgan is outperforming Bank of America in mortgage originations.

Along similar lines, Bank of America's trading business continues to underperform. By contrast, this was one of JPMorgan's strongest areas, which helped JPMorgan offset weaknesses in other side of its business such as consumer lending. The good news, though, was that Bank of America did exceptionally better this quarter reducing expenses by 4%. This is a reversal of the surprise uptick in the expenses seen in the April quarter.

As with JPMorgan and Wells Fargo, which have executed strongly in terms of cutting costs, I'm willing to credit Bank of America's management for the progress it has made in restructuring its business. But here, too, things need to be kept in perspective. To the extent that these recent performances justify the high expectations that the P/E ratio presumes, I don't believe it does.

I've said this recently: The "glass-half-full" perspective can only go so far. I don't believe the weakness in fee income should be overlooked, especially from a highly levered operation such as Bank of America. This does not mean the bank can't grow and execute its way into its valuation. There are clear signs that BofA has begun to regain consumer confidence. But there is also plenty of work left to be done to grow long-term profitability.

In that regard, I credit management for having said all of the right things and placing Bank of America on a clear path towards recovery. In the near-term, though, I can see the stock falling by as much as 15%. Fee income and better loan growth is still an issue.

It doesn't seem as if investors care about these sorts of details. So it would not surprise me to see the stock do what it's been doing all year -- disregard some fundamentals. But with Bank of America's 25% year-to-date gains already in hand, investors would be better served moving on to the next great idea.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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