Battle of the Big Banks

Well, well. The tables are finally turning.

For the last few years, big banks like Wells Fargo and JP Morgan have been the superstars of the financial sector. Warren Buffett has consistently praised Wells Fargo, and the media fawns all over rock star CEO Jamie Dimon of JP Morgan.

Meanwhile, banks like Bank of America and Citigroup have been largely ignored by investors. And even worse, Bank of America has been treated like an ATM for the Justice Department, which has squeezed it to the tune of $91 billion for its housing crash shenanigans. 

JP Morgan has had pretty much free rein in the wake of the financial crisis. Every year, billionaire Dimon’s bank passes the Fed’s annual stress tests with flying colors, raises the dividend, and buys back more shares.

And every year, BofA and Citi have their dividend plans rejected. BofA didn’t even ask for a dividend hike in the 2015 stress tests, despite paying a ridiculous $0.20 a year. Management knew the Fed would say no…

Sure, these stress tests are a joke. They are basically a beauty contest designed to instill confidence in Americans that the Fed is doing its job. So the Fed bullies the weaker banks to show what a tough guy it is…

But here’s the thing: Investing for long-term prosperity isn’t a beauty contest. If you buy the most visible stocks that have tantalizing stories, that’s no guarantee you will have success. In fact, it’s very often true that the best stories make the worst investments. 

Now, it’s not enough to simply buy cheap stocks. The best investments have catalysts that most investors don’t see but that will become apparent in time. It is these catalysts that will take cheap stocks and make them more expensive as other investors get wise.

That’s why I’ve been consistently recommending Bank of America as one of the best investments out there to basically anyone who would listen since the stock was trading for $9.40 in November 2012. It was one of the first recommendations I made when I took over as editor of The Wealth Advisory… and the stock has been one of our best performers, up around 75%. 

BofA vs. JP Morgan

Back in 2012, JP Morgan was winning the beauty contest. Slick-talking Jamie Dimon had everybody convinced that his bank was the bluest of the blue chips.

JP Morgan had mostly slipped past the subprime lending lawsuits, and investors believed Dimon was going to keep the profit train rolling from investment banking, despite the Dodd-Frank restrictions.

Bank of America, on the other hand, was the poster child for all that went wrong during the financial crisis. It was solidly in the crosshairs of the Justice Department due to its acquisition of Countrywide Financial. Never mind the fact that the Fed basically begged former BofA CEO Ken Lewis to buy out Countrywide and get those subprime loans into “stronger hands.” Talk about a deal with the devil…

To the casual eye, this was a no-brainer. JP Morgan was in good shape and led by a veteran. Bank of America, on the other hand, was teetering on the brink. It couldn’t afford to pay a dividend, it was selling assets to pay its bills, and it was led by a neophyte lawyer, Brian Moynihan. If you didn’t dig into the stories, you completely missed what was really going on. 

Put simply, yes, it’s true Bank of America was selling assets to pay bills. But it was also improving its capital base and streamlining operations so it could focus on its core business: money center banking.

Investors thought that was a bad plan. They wanted a return to the days when banks were like hedge funds, with big trading desks making daily bets in commodities and currencies, stocks and bonds.

It’s also true that Bank of America was trading at a 40% discount to its tangible book value. Tangible book value doesn’t include goodwill value, like brand name. It’s a simple brick-and-mortar valuation, giving you a lowball measure of what a company is worth.

The discount to book value was closer to 50%. I knew BofA had between 80% and 100% of upside coming…

Winning

I recommended Bank of America in the November 2012 issue of The Wealth Advisory at $9.40. At the time, JP Morgan was trading around $41.

Since then, JP Morgan has been as high as $70. That’s a 70% gain. Of course, Bank of America has done better, running 96% to a post-financial crisis high of $18.48.

Even now, with both stock off those highs, JP Morgan is up 46%, while Bank of America is up 67%. Oh, and JPM just missed third-quarter earnings, while BofA just beat earnings. 

Yep, the tables have turned. Momentum is shifting, and Bank of America (and my Wealth Advisory subscribers) is the winner. And it’s going to get even better…

I have a $24 price target on the stock. That’s 52% higher than the stock is now. I think it will hit $24 in the next six months. Because the next Fed beauty contest… um, I mean, stress test… results will come out in March of 2016.

I expect Bank of America to ask for a very large hike to its dividend — maybe even doubling it. And the Fed isn’t going to be able to deny it this time around. 

There’s a big run higher for BofA coming. You should get on board. 

Here’s What Else I’ve Got

I have several other stocks in The Wealth Advisory portfolio that have secret catalysts most investors are missing. My favorite one is an up-and-coming restaurant chain that has very similar numbers to what Chipotle was putting up 10 years ago.

I probably don’t have to tell you that Chipotle shares have done incredibly well, rising over 1,000%. 

I doubt you’ve heard of this restaurant chain that I’m calling “The Next Chipotle,” because it hasn’t moved into the major markets — New York, Boston, Chicago, or California — yet. But it will. And the stock is going to do incredibly well over the next few years as it continues to execute its expansion plans. 

So if you want a shot at a huge gain — maybe +1,000% — then check this presentation out.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.