A Pair of Book Value Bargains

 | Apr 05, 2013 | 12:00 PM EDT  | Comments
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Stock quotes in this article:

bac

,

aig

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.

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