Analysts are pretty optimistic about the company’s future. Disciplined cost management, paired with stronger macroeconomic indicators and share buybacks, will grow the company’s earnings going forward. The company’s stock is projected to grow its earnings by 14.61% per year over the next five years.
Why not own the bank?
I think that Bank of America Corp (NYSE:BAC) could be the most well-positioned bank in terms of earnings growth (I’ll have a separate article dedicated towards the financial sector soon.) The company has a large portfolio of higher-risk securities because in all likelihood, higher-rated (safe) securities are being dumped in favor of riskier assets. The risk premium on BBB-rated bonds is 1.57 currently, which is below the long-run average of 1.867. Assuming that Bank of America Corp (NYSE:BAC) accumulated its BBB mortgages and bonds when risk premiums were above the long-run average, you can basically assume that the company is better positioned than other banks.
Source: Bank of America
Around 57% of the bank’s assets are below a BBB rating, which implies that the bank is less exposed to coupon note depreciation. It is assumed that the interest rates from the lower-rated securities could make up for the bank’s mark-to-market accounting losses from depreciating AAA-rated securities. After all, treasury bonds are AAA-rated assets and those are declining in value right now. What a bank should own are lower-rated securities that pay a higher rate of interest. Those higher rates of interest would make up for the depreciation on higher-quality debt. Fortunately, Bank of America has positioned itself for this already.
The CEO, Brian Moynihan, also plans to cut back on spending by $8 billion by the year 2015. This is why analysts on a consensus basis anticipate that the company will grow its earnings by 23.39% per year over the next five years. The stock has 41.3 earnings ratio right now, which is reasonable when considering the projected rates of growth.
Conclusion
Investors need exposure to housing in their investment portfolio. Owning an actual house could be the most lucrative choice right now, but there are other options as well. The home ownership population has declined and the total number of households have gone up, so there’s a lot of pent-up demand which can be reflected in the backlog figures presented by KB Home (NYSE:KBH).
Using that, as a leading indicator, we can also assume that demand for mortgages and home improvement will be up as well. Therefore, investors should consider a position in companies such as KB Home (NYSE:KBH), The Home Depot, Inc. (NYSE:HD), and Bank of America Corp (NYSE:BAC).
The article The Housing Recovery Is Offering Lucrative Investment Opportunities originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Home Depot. The Motley Fool owns shares of Bank of America. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
