Friday, January 7, 2011

Goldman Sachs: "Buy Bank 0f America Calls" (BAC; FAS; FAZ; XLF)

The stock closed yesterday at $14.44, down six cents.
The April $16 calls were last quoted at 50 cents bid-51 offered.
We have some more ideas after this piece from Barron's The Striking Price column:

How to Play the Coming Bank of America Rally 
Goldman Sachs suggests buying calls in anticipation of an upside move.
Goldman Sachs' influential derivatives strategists are telling clients to prepare for Bank of America to surge higher.

In a recent note, John Marshall and Maria Grant told clients to buy Bank of America's (ticker: BAC) April $16 calls because investors have underestimated the battered bank's potential to rally higher.

The battered stock declined 9.2% in the past year, and was recently trading around $15 as investors remain apprehensive over Bank of America's potential liabilities on bad mortgages. Goldman believes a steady stream of events will clarify Bank of America's murky situation once and for all, and free the stock to rally.

The first major event is the Thursday start of the Federal Reserve's capital assessment process. The Fed has directed 19 financial institutions deemed systemically important to submit capital plans that include the results of stress tests under different scenarios. Bank of America's plan could be the catalyst that alleviates market fear about bad mortgages, and enable Bank of America to raise dividends or buy back its stock.

In addition, Goldman expects Bank of America's management will provide additional clarity about mortgage-backed securities exposure on the Jan. 21 fourth-quarter earnings call. "This could serve to narrow the potential pool of losses perceived by investors," Marshall and Grant noted.

By March 20, the Federal Reserve will respond to each bank's capital plan. The Fed will also detail capital requirements, dividends and buybacks. Goldman expects many of the banks will fare well in this process, and that Bank of America may very well raise its dividend.

Of course, the bullish thesis is predicated on a lot of ifs and buts, yet wagering on Bank of America is a rather inexpensive proposition.

When Bank of America traded at $14.24, the April $16 call traded at 43 cents. If the stock moves to its 52-week high of $19.48 by the April expiration, Marshall and Grant estimate the calls could return more than 700%. Of course, if bad news whacks Bank of America yet again, call buyers risk losing all the money they spent to buy the calls. At 43 cents, the wager seems well worth taking.
Also at The Striking Price:
January 05
Citigroup Q4 Could Make or Break the Bank  
January 04
The Smart Money Girds for a Drop in Stocks
Here's the one year chart via BigCharts:

The late November bottom came on the 30th with $10.91 intraday and $10.95 closing prints.
The January gap up is worthy of note. The stock closed at $13.34 on Dec. 31 and opened at $13.85 on Jan. 3. That's just shy of 4% and large enough that the stock may want to revisit some or all of the gap before breaking decisively higher.
Nov. 1 
"A Secret Route to Banking's Potential Riches" (BAC; HIG; JPM; WFC)
Nov. 8 
"Bank of America a Good Two-Month Bet, Morgan Stanley Says" (BAC; XLF)
Nov. 22 
Chartology: Bank of America (BAC)
Dec. 10 
"Financial Rally: Third Time the Charm?" (XLF; FAS; FAZ; BAC; C; GS; JPM; MS; WFC)

May 26
"Citigroup, Bank of America Up Six Times by 2015 Says Dick Bove" (BAC; C)