The report for Bank of America is updated with a rating of Speculative Strong Buy at $13.69.
Bank of America reported Q4 earnings per share which were 9% higher than the year ago quarter but which earnings remain affected by various items related to lingering effects of the financial crisis. The thesis for buying this company is that it trades at a low multiple to book value and at a relatively low P/E ratio while its earnings are expected to rise as it puts the lingering effects of the financial crisis behind it. It did report an increase in bad loans in the energy sector but this did not appear to be a significant matter. It’s quite likely that this Bank will increase its dividend substantially in 2016 as the dividend was cut sharply (or eliminated) during the financial crisis and remains now at a low level.
Given the recent declines in the stock market which certainly includes the stocks that we have rated in the Strong Buy category, it is a good time to consider a number of questions that might come to mind in considering whether to buy any given stock:
1. Will the Stock rise in the short term? With a strong Buy I would hope that would be the case but I never know. Even stocks that seem to be very much under-priced can fall due to a general market decline, a decline in that sector or changes in the outlook for that specific company or various surprise events.
2. Is the stock undervalued considering its value ratios and its outlook for growth and all of the many factors that affect valuation? That is the question that our analysis reports attempt to answer. Those reports provide a lot of data and facts and our interpretation of those facts. Any stock that we rate as a Buy or higher such as (higher) Buy or in the Strong Buy range is a stock that we think is at least fairly valued and that has a good outlook and where our conclusion based on all the factors looked at in the report is that the stock will likely rise in price over the years and provide at least an acceptable return. There are no guarantees. Our performance figures look at whether the stocks that we rate move in the predicted direction over each calendar year. Essentially it is disappointing if any Buy or higher rated stock is lower one year after a rating is applied. I suppose it also disappointing if it is lower after a month but realistically a year is a more reasonable time period over which to judge performance.
3. Given that a particular stock is expected to give a good return, is it the best available investment given consideration of other choices that an investor is aware of and given considerations of asset allocation and diversification? That is something that is always specific to each individual. A stock rated Strong Buy might be suitable for some investors to buy but not others due to different risk tolerances and different portfolio diversification or knowledge of other attractive available investments.