Bank of America (NYSE: BAC) has experienced a sell off as of late. Market researchers speculate that this activity has originated with the buy-and-hold investors, after reading last weekend’s Wall Street Journal article that indicated the Bank may need to issue more equity before exiting the Troubled Asset Relief (TARP) Program.
If this is indeed the motivation to sell off the stock, there is a fundamental problem. Banks have historically faired poorly in recessions, as their Beta tends to surpass the market. But, Bank of America has navigated the rough seas this year, and is poised for a great 2010.
If you combine the thoughts of exiting the TARP, and participating in the growth in the market, BofA stock will likely outperform the market next year. While a new equity raising will dilute BofA shareholders, this is not a stock you hold for dividends – this is a company you invest in for price appreciation. In the last 52 weeks, the stock price has fluctuated between $2.53 and $24.62 per share, and currently stands at $14.58.
While it makes sense that bank investors would sell their shares on this news, it may actually be good thing for shareholders if U.S. banks are prodded raise additional capital. For one, if they do go this route, they will look more like Canada’s banks, and, if you’re judging by stock performance over the last half-decade or so, that would be a big positive as Canada’s 5 largest banks have outperformed American heavyweights like JP Morgan.
Banking stocks follow predictable patterns, and the ‘too big to fail’ institutions are on the verge of creating solid profits and returns for investors. As Benjamin Graham surmised, “Buy straw hats in the winter time.” So, although popular sentiment may be against the banks right now, the smart money will likely start flowing in soon.
