Buy Companies that Regulators Slap on the Wrist

Executive meeting

Today’s regulation heavy world means that companies are often in the spotlight. That can include for actual wrongdoing or perceived wrongdoing. Big companies tend to get hit with seemingly large fines. But for companies that are large enough, even a big fine amounts to little more than a slap on the wrist.

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  • Investors in these companies may see a few hits from time to time, but it’s also a sign that a company can handle fines and fees.

    One recent fine was the $250 million levied against Bank of America (BAC) by the Consumer Financial Protection Bureau (CFBP). The regulator based that on so-called junk fees and the bank withholding credit card points, among other measures.

    But that fine is less than one percent of the bank’s $94 billion in revenues last year. That’s a slap on the wrist.

    Action to take: The megabank has been growing at high-single-digit levels, about on par with its size. But with shares trading at less than their book value, they look underpriced compared to peers. Plus, the bank has a 30 percent profit margin.

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  • Investors can get a 3 percent dividend at current prices as well. Bank of America has a history of increasing its payout over time.

    For traders, shares are at the lower end of their range and may trend higher following this fine. The September $30 calls, last going for $0.83, could see mid-to-high double-digit returns from here.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.

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