A Pair of Book Value Bargains

 | Apr 05, 2013 | 12:00 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:




Since emerging from the market crisis in 2009, the financial sector has come a long way. In retrospect, it is difficult to believe how cheap the shares of major banks and other large financial institutions got -- in the depths of the panic, all of the major financial players were selling for half of book value or less.

But the financial sector has recovering a lot of its lost book value since then as earnings have recovered, the housing market has rebounded and credit writedowns have lessened. However, several major financial institutions are still selling at around 60% of their stated book value.

Two names that I believe will reward shareholders over the long term are Bank of America (BAC) and AIG (AIG). Both have lingering problems with their reputations from the financial crisis and are working through all the litigation fallout as well. However, shareholders should be rewarded as these firms put their recent ugly past behind them and get their stock's value up near book value again over time.

Bank of America: It is difficult to know if this institution employs more bankers or lawyers these days as it deals with all the mortgage litigation from the ill-timed acquisition of Countrywide and fallout from the housing collapse. The company is gradually working through the civil, federal and state lawsuits. Meanwhile, the fundamentals of its core banking business keep improving. Charge-offs and loan loss provisions will likely fall significantly again in 2013. In addition, earnings are set to increase for the third year in a row this year and analysts expect revenues to increase for the first time in three years as well.

The bank also did well in the recently completed stress tests. The stock sells for around 9x 2014's expected earnings and BAC is priced just below 60% of book value. I have owned the stock since it was trading just above $5 a share and it is currently selling near $12. As the company's fundamentals continue to improve and the housing rebound continues, it is able to start increasing its dividend substantially again; I think BAC can sell for its current book value by year-end 2015, which would get my investment to $20 a share.

AIG: The large insurer is a recent addition to my portfolio. I rarely invest in a firm based largely on its CEO, but Robert Benmosche is an exception. The man is straightforward, extremely smart and a great manager (click here for a classic CNBC interview). The way he managed to turn AIG around is just short of miraculous. Personally, I think we should place a statue of him in front of the IRS building for the tens of billions of dollars he has saved taxpayers with his work at AIG. The company is on the mend and sells at just 57% of book value. The company has repaid the government (which made a $22 billion profit in the deal), revamped its balance sheet by selling off business lines and its stock sells at less than 10x trailing earnings. Now out of the government's clutches, I expect the stock to approach its current book value over the next few years as well and that would suggest a price in the high $50 range.

Columnist Conversations

today is a good day to lighten the load and take some positions off the table. SOLD WB OCT 85 CALL AT 11 (i...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.