Pop quiz: If Bank of America stock is trading at $39, and Wells Fargo’s shares are changing hands at $47, which one is cheaper?
If you automatically answered “duh, B of A, it has a lower price,” without asking for more information, please do not start buying cryptocurrency. (Or stocks.)
As sophisticated investors – who make up the majority of this newsletter’s readers – know, determining the relative value of different assets isn’t as simple as comparing their prices. To suss out whether B of A is really a bargain compared with Wells, you would probably start by considering their prices in light of the companies’ profits.
According to Bloomberg data, at the Thursday closing levels quoted above, B of A had a price-to-earnings (P/E) ratio of 12.66, a tad higher than 12.48 for Wells, suggesting that the market values them roughly the same.
Another tried-and-true measure of relative value is how a company’s stock price compares to the sum of its assets minus its liabilities. By this measure, B of A has a price-to-book value ratio of 1.3, slightly above the 1.1 for Wells.
Again, the above is probably old hat for most “Crypto Long & Short”