After the Federal Reserve raised its federal funds target rate for the first time in nearly a decade in December and led many to expect several more hikes in 2016, Bank of America (NYSE: BAC) was counting on rising interest rates to boost its interest-based income and net interest margin. But that hasn’t happened, due to weaker jobs growth and GDP data.
Still, there’s reason to be bullish. For starters, Bank of America has put most of its mortgage-based litigation behind, leaving it with fewer expenses, better visibility and more transparent performance numbers.
General cost-cutting is another reason Bank of America looks attractive. It has been able to scale back its overhead costs via some branch closures to take advantage of the push toward mobile banking. Mobile and ATM transactions are substantially cheaper than in-person transactions, giving B of A an incentive to cater to mobile consumers.
Bank of America also offers an intriguing value proposition. The company is trading well below its book value, primarily as a result of its subpar return on assets. However, improved expense efficiencies, coupled with the expectation of interest-rate normalization at some point in the intermediate term, should help push its return higher.
With a dividend that recently yielded 1.5 percent, Bank of America is worth considering for your portfolio.
Ask the Fool
Q: What’s deflation? – J.R., Norfolk, Virginia
A: Deflation is the opposite of inflation, occurring when prices fall over time. It typically happens during a recession and can contribute to rising unemployment and decreased production. While lower prices might sound like a good thing, remember that they reflect an ailing economy, where supply is greater than demand, as many people and businesses are financially pinched and are delaying purchases.
Fortunately, though, there are measures that can be taken to combat the threat of deflation. The Fed, for example, can lower interest rates or increase the money supply to spur inflation a bit.
If you’re worried about deflation, you might prepare yourself for a possible pullback in stocks, perhaps locking in some yields with government bonds. Deflation is relatively rare, though, and a little inflation can be good for us.
Q: When preparing my tax return, will I be able to deduct a big loss from a stock sale? – K.W., Midland, Michigan
A: Yes. Losses sting, but their silver lining is that they can help shrink your tax bill. You’ll first offset any capital gains from stock sales with your loss. If any loss remains, it can be deducted from your income – up to $3,000 per year. Sums above $3,000 can be carried over to the following year.
If you’re in the 25 percent bracket and you deduct $3,000 from your income, you’re excluding that amount from taxation. So you save 25 percent of $3,000, or $750, and don’t have to pay that in taxes.
My dumbest investment
My dumbest investment was in LeapFrog Enterprises, a company that made educational electronic toys for children. They were kind of like early versions of the tablets we enjoy today, but while they were initially embraced by many, today every 3-year-old can have a fine time with his mother’s or dad’s iPad. No one seems to need LeapFrog devices anymore. – B.W., Atlanta
The Fool responds: Compelling competition was indeed a key reason that LeapFrog faltered, but remember, iPads, costing hundreds of dollars, were still significantly different from LeapFrog offerings.
LeapFrog performed well as an investment for a while, but then it did fall on hard times. In mid-2015, it posted quarterly results that featured sales down by more than 30 percent in the U.S. and abroad, and inventory swelling by nearly 40 percent. Management said it would be developing new products to address new markets, but investors were not encouraged and many sold, sending shares down further.
LeapFrog’s market value sank to around $40 million by early 2016, when the Hong Kong-based company VTech announced its intention to buy LeapFrog for around $72 million. VTech long has been in the electronic learning toy business and wanted to add LeapFrog’s assets to its mix to broaden its portfolio.
The LeapFrog story is a good reminder that we need to keep a close eye on our holdings to make sure they’re performing well and their prospects are still strong.
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