Use This Simple Strategy to Take Advantage of Bank of Americas Recent Drop

Share of Bank of America have fallen by 16% since peaking at $18.45 per share earlier this year. But far from being a foreboding sign, I believe investors should take this as an opportunity to load on up shares of the nation's second biggest bank by assets.

I've explained why I'm bullish on Bank of America multiple times over the last few weeks, so I won't belabor the point here. That said, here's a quick overview of the main reasons I'm optimistic:

  1. A recent legal ruling allowed Bank of America to slash its outstanding legal liabilities by $7.6 billion. The ruling also throttled the filing of new claims, which fell from an average of $2.6 billion a quarter over the past year down to only $240 million in the latest quarter.
  2. All three of the nation's leading credit agencies increased Bank of America's debt ratings in the second quarter. If this trend continues, Bank of America could make as much as $2 billion more each year without so much as lifting a finger or incurring additional expenses.
  3. Bank of America's CEO, Brian Moynihan, adopted an unusually optimistic tone on the bank's latest conference call, hinting that its executives believe the bank may be on the verge of a rapid recovery in profitability.
  4. Finally, Bank of America's latest quarter was its best performance since 2008. The bank generated a 0.99% return on assets, which is just below the 1% threshold that healthy banks strive to exceed. And this was despite the fact that interest rates are still at historic lows. Once rates do increase -- we don't know when this will happen, but it seems reasonable to conclude that they will eventually "normalize" -- the bank estimates that it will earn $4.6 billion in additional net interest income a year.

The point is that most things are going in the right direction for Bank of America. But despite this, its shares continue to trade for a large discount to book value. After the drop on Monday morning, they're valued at a 27% discount to book value.

That's a huge discount for a bank with the franchise and potential profitability of Bank of America. Thus, the question should be less about whether you're going to take advantage of the latest fall, and more about how you're going to do so.

It's my opinion, that the best way thing for savvy investors to do in a situation like this is to average into a position. Let's say that you want to invest $1,000 in Bank of America's shares. In this situation, I believe it's smart to buy shares in increments -- say, four purchases of $250 worth of shares over the next four days, as opposed to a single $1,000 purchase today. Not only will this allow you to exploit Monday's drop, but it will also position you to benefit from subsequent declines that may come in its wake.

Yes, if the market recovers tomorrow, you'll miss out. But that's a small price to pay in my opinion to retain the flexibility to double down on your investment if stock prices continue to slide.

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John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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