Great Call on Lehman Brothers! What's Next?

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The collapse of Bear Stearns, which seemed so significant at the time, now seems more like a light drizzle compared to what we're now experiencing as we enter, or head rapidly toward, the eye of this 50-year storm on Wall Street. All at once we've had Fannie Mae (NYSE: FNM), Freddie Mac, and AIG (NYSE: AIG) basically taken over by the government. Merrill Lynch (NYSE: MER) is being swallowed by Bank of America (NYSE: BAC), and both Morgan Stanley and Goldman Sachs (NYSE: GS) are shedding their rowdy party-guy images and becoming bank holding companies.

And of course, Lehman Brothers filed for a bankruptcy that will certainly go down in the record books.

More than 1,700 members of the CAPS community  had logged their opinion on Lehman's stock prior to its bankruptcy, with 910 members bullish on the stock (including me -- ouch!) and 800 bearish. If there was one CAPS member that was right on the money when it comes to Lehman, though, it was Sue987654321. Starting in March, Sue made four timely underperform calls on Lehman that collectively scored her 235 points.

Sue is one of CAPS' All-Stars -- players with a rating of 80 or greater -- and she has managed a stock-picking accuracy of 63% on her calls while racking up nearly 1,000 points. Lehman hasn't been her only great call. Here's a look at a few of her other prescient picks:

Company	Date Picked	Call	Points	CAPS Rating (out of 5)
Fannie Mae	8/19/08	Underperform	84	*
Freddie Mac	8/21/08	Underperform	68	*
Washington Mutual (NYSE: WM)	8/21/08	Underperform	45	**

Data from CAPS.

So what is this investor looking at these days? Here are a few of her most recent calls on CAPS:

Company	Date Picked	Call	CAPS Rating
Bank of America	9/22/08	Underperform	***
AIG	9/15/08	Underperform	**
Apple (Nasdaq: AAPL)	8/8/08	Underperform	***

Data from CAPS.

While not all of these picks may pan out, they could be a good place to start some further research. I decided to take a closer look at a couple of these stocks.

Too big to fail?
Though the government let Lehman fall into the abyss, it clearly thought that AIG was too large and entwined in the financial system to let it do the same. This certainly falls under the heading of "bailout," but that's of little comfort to equity investors. Though the large holders of AIG are trying to craft a plan that will be more beneficial to shareholders, the original bailout gave the government warrants to buy nearly 80% of the company. And it might not be surprising if many smaller investors consider everything that happens from here on out just details -- after all, the stock has already lost more than 90% of its value in the past year.

In short, "too big to fail" is going to be cold comfort to equity investors.

The phrase has certainly been tossed around when it comes to Income Investor pick Bank of America, the largest U.S. bank by deposits and market cap. And though some highly rated CAPS players, like Sue987654321, are bearish on the bank, many investors and CAPS members see Bank of America as a giant financial lemonade stand, taking advantage of the ample lemons that the financial crisis has produced. In addition to the takeover of Merrill Lynch, this banking behemoth devoured mortgage lender Countrywide early on in the meltdown. Both acquisitions will help BofA expand beyond its core banking business and should help it become an even larger, stronger, and more profitable company in the long term.

The three-star rating that BofA has on CAPS indicates that not everyone is bullish on the bank. However, nearly 5,500 CAPS members have rated the stock an outperformer. Carterhiggins, one of those BofA bulls, recently gave his thumbs-up and said:

[Bank of America] and [US Bancorp (NYSE: USB)] will be two of the financial companies that come out of the current mess (9/2008) with more than what they started with. There is a fire sale and [Bank of America] is cleaning up right now-Countrywide and Merrill will be the first two. I am sure there will be more to follow.

So what's your take on Bank of America? Is Sue987654321 right that there's more downside to come, or will it be one of the winners from the current quandary? Get in the action by clicking over to CAPS. CAPS is absolutely free and has more than 115,000 members chipping in to find the best stocks out there.

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