Bank of America’s Q3 Encourages Bulls

Better revenue growth, visible operating leverage and manageable credit-cost increases will drive upside.

Credit Suisse

With Bank of America’s third-quarter upside, we’re raising our full-year 2017 earnings-per-share estimate to $1.81 from $1.77; our 2018 and 2019 EPS estimates are unchanged at $2.10 and $2.30 per share, respectively. Our target price is unchanged at $31.

We continue to recommend purchase of Bank of America (ticker: BAC) shares and are that much more encouraged in prospects for outperformance given year-to-date results. Better revenue growth, visible operating leverage and manageable credit-cost increases will drive realization of franchise value.  [We rate Bank of America at Outperform.]

See entire article here.

BofA says two areas a life raft for investors

BofA-Merrill Lynch names two places which could keep investors in green.

Bank of America-Merrill Lynch is warning investors not to chase the rally.

Even though it’s predicting the end is near, the firm isn’t advocating a strategy which would push money to the sidelines.

“The market is trading quite elevated,” said Marc Pouey, BofA Merrill Lynch’s senior U.S. equity strategist, told CNBC’s “Futures Now” recently. “But I think underneath the surface there are quite a few opportunities out there.”

According to Pouey, there are two sectors which will likely be immune to a broader market downturn.

“Two of the glaring areas for me are financials and in health care which are both trading at a discount to the market here,” he said.

Pouey sees financials as a growth story.

“We’ve seen over 10 percent dividend growth in the space. They’re also buying back their stock very, very aggressively,” added Pouey. “They’re rewarding shareholders from that perspective.”

He made the case for health care based on the sector’s history.

“If you look back over the last three years or so, consistently — every single quarter — health care delivers top-line and bottom-line beats outside maybe a couple of quarters. They are really delivering the goods there,” said Pouey, noting that biotech is a shining area, too.

BofA’s S&P 500 Index year-end price target is 2450; that’s four percent below current levels. Pouey’s comments came as the index recorded its longest winning streak since 2013.

In a special note to CNBC, he called the environment a “sentiment driven market with the S&P 500 trading at a 17.8x forward price/earnings (PE) ratio, at cycle highs, and 1.5 multiple points above pre-election levels.”

As for market risks, the biggest issue is the lack of one.

“Near-term, there probably aren’t many risks, which is maybe the biggest risk,” Pouey said.

One spot he particularly finds negative is small-cap stocks. Pouey urged investors to fade the rally that area — pointing out its forward PE is within just one percent of cycle highs.

Read original here by Stephanie Landsman of CNBC

BofA Is Now Worth (Slightly) More Than Wells Fargo

By Shawn Tully, Fortune

One of the most amazing reversals in the annals of financial services is now official. As of September 13, Bank of America’s market cap has edged past that of its arch rival Wells Fargo. At 10:30 AM, Bank of America’s value stood at $255.9 billion, just over $1 billion higher than Wells’ cap of $254.85 billion. Of course, the contest is so close that BofA could slip easily slip behind within hours or days, so we’ll call the race between the banking behemoths a tie.

Will Gold 4577 100 Capital Partners Denver ColoradoThe odds that BofA could possibly catch Wells seemed long indeed as recently as the summer of 2015. On July 20th of that year, BofA was worth just $188 billion versus $299 billion for Wells. But in just over two years, the entire $111 billion gap has vanished, as BofA’s stock has roared 34%, and Wells’ shares went the other way, suffering a drop of 11.4%.

BofA’s market value got a big lift in late August, when Warren Buffett exercised warrants to convert his giant holdings of preferred stock into 700 million common shares. Buffett, who’d delivered a sorely needed endorsement to then-beleaguered CEO Brian Moynihan by investing $5 billion in BofA preferreds in 2011, locked in a profit of $11.5 billion. The conversion to common shares boosted BofA’s share count by 6.6%, providing the extra lift that enabled it to catch Wells.

BofA’s rise and Wells’ decline also represents something of a reversal in strategies. During the financial crisis, BofA was the reckless gambler that got hammered, and Wells the prudent player that emerged relatively unscathed. But since becoming CEO in 2010, Moynihan has charted a conservative course of shunning risk and catering to the expanding needs of today’s customers, while Wells nurtured a go-go sales culture that exploded into scandal when it was disclosed that employees created fake customer accounts to boost their bonuses.

In banking, JP Morgan Chase remains the champ, boasting a market cap of $321 billion, 25% higher than its two closest rivals. The chance that BofA rather than Wells would emerge as the most likely challenger to JP Morgan seemed impossible two years ago. Moynihan argues that given its gigantic, low-cost deposit base and strength in the fast-growing Southwest, BofA’s run is just beginning. And don’t count Wells out; it remains enormously profitable despite the damage to its once-sterling brand. Suddenly, the contest to become America’s most valuable bank has become a three-way race.

See original article here and more from  Shawn Tully of Fortune 

Ride the coattails and think like Buffet

Excellent fundamental value and investing in the U.S. financial system.

Buffett Converts BofA Warrants Into $16.5 Billion Stake in Bank.

Warren Buffett’s Berkshire Hathaway Inc. exercised warrants to buy 700 million shares of Bank of America Corp., locking in an $11.5 billion investment gain in a move that was telegraphed earlier this year.  Buffett invested $5 billion in Bank of America in 2011 in exchange for preferred stock and the right to buy common shares.  The cash infusion helped the bank put to rest doubts about whether it had enough capital, and its shares have more than tripled since then. Berkshire said in a statement in June that it would convert its preferred shares into common stock once the Charlotte, North Carolina-based bank increased its dividend. The common shares that Berkshire received are worth about $16.5 billion. “In 2011, we welcomed Berkshire Hathaway as a shareholder, and we appreciate their continued support now as our largest common shareholder,” Bank of America Chief Executive Officer Brian Moynihan said Tuesday in a statement announcing that the transaction was completed.

See original by Noah Buhayar at Bloomberg by clicking here.

A Case for Concentrated Portfolios

Will Gold Denver Colorado 100 Capital PartnersHere is an article that will provide some in-depth background and a case for concentrated portfolios.  Its a good read.

With the rise of the Modern Portfolio Theory, for more than five decades diversification has been inherent to portfolio construction. However, this trend has evolved into what may be deemed over-diversification—where securities are included in a portfolio to dampen volatility rather than because of fundamental stock picking. We believe the inclusion of a security in a portfolio should be driven by high conviction in the underlying investment idea.

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Shrinking the float

BAC massive buyback provides price support and downside protection, continuing for years. It’s a great read.

The Federal Reserve unconditionally approved Bank of America’s 2017 capital return plan as a part of its annual stress test for the country’s biggest banks (see Fed Clears Capital Plans Of All U.S. Banks Subject To Stress Tests For The First Time In Seven Years). Following the approval, the diversified banking giant announced plans to hike its quarterly dividends by 60% – from 7.5 cents now to 12 cents a share beginning Q3 2017. The bank will also repurchase $12 billion worth of its common shares over the next twelve months, and has also set aside an additional $0.9 billion to repurchase shares to offset an increase in shares from its stock-based employee compensation plan.

Bank of America’s capital return figures for each year since 2005Given the bank’s roughly 9.95 billion outstanding shares, the 2017 capital plan entails a payout of almost $17 billion to investors over Q3 2017 – Q2 2018. This is more than double the $8 billion figure announced by Bank of America as a part of its 2016 capital plan. We are currently in the process of updating our price estimate for Bank of America’s stock in light of its better-than-expected capital return plan.

See entire article in Forbes by clicking here.