Monday, August 15, 2011

Time to Bet on Bank of America (BAC)

The stock closed at $7.19 on Friday, down six cents in a generally up market.
As we've pointed out,* there is a gap on the chart dating to March 2009. Be careful.
If buying set stops at 25-30 cents below your entry price. If stopped out, the market is telling you that either the timing or the investment thesis is wrong.

From Barron's:
Shares of the giant bank are down 46% this year, thanks to the housing mess and worries about a global slowdown. At their current level, that's all priced in and more.

Investors pulled their money out of Bank of America with both hands last week, driving the stock to its lowest level since March 2009, as concerns about a slowing economy rattled the banking industry, and lingering losses from loans it made during the housing bubble raised fears that the bank would need to raise additional capital.

At $7.19 apiece, Bank of America's shares are among the cheapest in the industry. They trade at just 57% of tangible book value and 4.9 times estimates for next year's earnings. If shares trade up to tangible book they'd be worth $12.65. Put a multiple of 10 on 2012 estimates and they're worth $14.70.
The bank has made some progress in cleaning up after the housing meltdown. It has bolstered reserves on its $939 billion loan portfolio to $37 billion. If loan performance doesn't get worse—a big if in many investors' minds—the bank won't have to increase those reserves and a major drag on earnings over the past few years will disappear.

Bank of America (ticker: BAC) has also improved its liquidity and its capital, with $400 billion of cash and liquid assets on hand and $1 trillion in deposits. The bank's earnings power was apparent in its second quarter results. Outside the residential mortgage area, the bank's businesses generated roughly $6 billion of net income, and each enjoyed lower provisions for credit losses.

But the good news has been overshadowed by the bad: the European debt crisis, a chaotic stock market and fears about global growth, which pushed U.S. Treasury yields down. That's to say nothing of the heap of lawsuits stemming from the mortgage mess.
Low interest rates are hurting net interest income at all banks. And a faltering global economy could mean the industry underwrites fewer securities, trades less, makes fewer loans and facse higher-than-expected loan losses.

Matt O'Connor, an analyst at Deutsche Bank wrote in a note last week that his $1.35 earnings estimate for Bank of America in 2012 could fall by 47 cents and his $1.75 estimate for '13 could be too high by 96 cents. Betsy Graseck, Morgan Stanley's bank analyst, lowered her 2011 earnings estimate by six cents, to 76 cents a share and her 2012 estimate by 29 cents, to $1.53 a share. She lopped her bullish target price by $2, to $15....MORE
Aug. 8
"S&P Spares the Banks From Downgrade" (BAC; C; JPM; WFC)
Aug. 8
Where Would We Be Without Analysts? CLSA's Mike Mayo Cuts Bank of America to Underperform (BAC)
Aug. 8
Bank of America in Deep Doo-doo: "Here Comes TARP 2: Bank Of America Implodes, At $6.87, BAC CDS Up 20% To 260 bps As Bankruptcy Contemplated" (BAC)
Aug. 5
"Meanwhile, in Bank of America news" (BAC)
*Aug. 4
Remember "Is Bank of America At Risk of a Death Spiral? (BAC)"
July 21
Is Bank of America At Risk of a Death Spiral? (BAC)

The stock is down 30% in the 25 days since that first Death Spiral post.
As the retail guys say: "And if you annualize that, Mr. Big..."