As predicted from the previous article written ("How Investors Can Cash in on Bank Earnings"), JPMorgan Chase and Bank of America were the most vulnerable for downside surprise based on most recent history and analytics. Although JPMorgan's miss was only 9.2%, Bank of America missed by 200%. Both stocks were hit with three-week stock price losses of 3.2% and 5.4%, respectively. Bank of America's stock losses were further exacerbated by the management admission of a capital calculation error on the Merrill Lynch unit that led to a temporary suspension of share repurchase buybacks and subsequently approved dividend increases.

So, if you took my advice you could have cashed in nicely over the last three weeks, but what do you do now if you missed that opportunity or are a long-term investor with a buy-and-hold strategy? The table below shows the revised fiscal year earnings estimates for 2014 and 2015 along with price targets and potential returns.

Over the next year, the best plays based on current valuations and stock price appreciation for FY2014 would be JPMorgan Chase and Citigroup with expected returns of 49% based on a historical industry price-to-earnings ratio of 15. Current stock prices would give these stocks some of the lowest forward looking P/E ratios, at 10 times. However, given that JPMorgan has missed its last three quarterly results and may be subject to further downward revisions, I would lean more toward Citigroup for reliable upside potential.

Currently the forecast for Wells Fargo provides a nice projected return of 23.3% for 2014 and with the company's ability to deliver consistent earnings growth that beat estimates, it would probably be the safest play.

For Bank of America, in the short term over the next six to 12 months, I would not be a buyer of additional shares unless the stock dipped below $15 share because of uncertainty with its future plans for excess capital distributions and the newly filed Department of Justice lawsuit for $13 billion. Although this will most assuredly be settled at less than the full value, the current drag on earnings could be anywhere from $1.24 per share to 57 cents per share if settled, based on what Bank of America has forecast in litigation expenses going forward.

Once these additional mortgage litigation charges and capital distribution plans are resubmitted, Bank of America will be a strong performer in the back half of 2014 and FY 2015. The expected stock price return for 2015 should lead the group with an almost 62% return, which would far outpace the second best performer for 2015 in Citigroup at 16.2%.

I am of the opinion that with over $50 billion in settlement charges since the financial crisis began, or $4.76 in earnings per share, that the light is at the end of the tunnel for Bank of America. Current management with Brian Moynihan as CEO has done an excellent job of ridding the bank of its former toxicity with perhaps one of the worst acquisitions in banking history with the imploding of the Countywide Mortgage mess. He deserves at least some credit for taking the pain now and swiftly settling litigation as it comes up instead of dragging it out indefinitely.

At the time of publication the author had positions in BAC, C and WFC.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


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