Worst Stock for 2009: Bank of America

Which 10 companies should you keep out of your portfolio? Find out in our special series on the Worst Stocks for 2009.

Bank of America (NYSE: BAC  ) looks cheap. Dirt cheap. Knock-down, deep-value, cigar-butt cheap. Just look at the way it stacks up against its peers in terms of valuations. B of A is trading at one-third the book value multiple of JPMorgan Chase (NYSE: JPM  ) and approximately one-fifth that of Wells Fargo (NYSE: WFC  ) .

 

Price/ Book Value per Share*

Price/ Tangible Book Value per Share*

Bank of America 

0.23

0.91

Citigroup (NYSE: C  )

0.24

0.83

JPMorgan Chase 

0.69

1.30

UBS (NYSE: UBS  )

0.88

1.27

Wells Fargo 

1.14

4.08

US Bancorp (NYSE: USB  )

1.31

3.45

*As of Jan. 27, 2009.
Source: Capital IQ, a division of Standard & Poor's.

Is that a flashing “buy” signal? Not for my money -- I think Bank of America falls into the “cheap for a reason” category at this stage. This doesn’t mean that one can’t make money on the stock, but that would pertain to ...

A speculation, not an investment
Bank of America is a speculation because shareholders face tremendous uncertainty in this situation. There is no question that the institution will survive -- the U.S. government will not allow it to fail -- but that doesn’t tell us much about the end outcome for shareholders. 

The bank has already been forced to ask for a second round of aid from the government (for a total of $45 billion, in addition to a $118 billion loss-sharing arrangement) in the wake of its tumultuous acquisition of Merrill Lynch. Even though the new administration is finalizing plans for another rescue of the banking sector, we do not yet know what form it will take or what the ultimate impact on shareholders will be.

In this crisis era, the government has a much expanded role in the financial services sector; Bank of America is no longer full master of its destiny. That’s why I consider the stock a speculation, rather than an investment. However, the Merrill deal shows that its predicament originated within the bank and is ...

A comeuppance for an empire-builder
"Empire-builders" is a derisive term for CEOs who are driven to enlarge the domain over which they reign through conquest. For such executives, "doing deals" is the name of the game. Here is a short list of some of the major acquisitions B of A CEO Ken Lewis has completed since he reached the top spot in 2001:

Closing Date

Transaction

Size

January 2009

Merrill Lynch

$44.4 billion

July 2008

Countrywide Financial

$4.2 billion

October 2007

LaSalle Bank

$21.0 billion

 January 2006

MBNA

$34.6 billion

April 2004

FleetBoston Financial

$53.7 billion 

Source: Capital IQ, a division of Standard & Poor's.

In fact, B of A is itself the product of empire-builders; acquisitions appear to be part of its corporate DNA. Ken Lewis' predecessor, Hugh McColl, earned the nickname "Huge" because of his voracious appetite for deal-making.

You might ask what is so problematic about a strategy of growth by acquisitions. Nothing ... in theory. If acquisitions are made at attractive prices (i.e., below fair value), they are accretive to value. Look at Berkshire Hathaway (NYSE: BRK-B  ) , for example; Warren Buffett has put together a remarkable collection of businesses. However, he is rarely accused of overpaying for them.

Where the rubber meets the road ...
... Most CEOs let their will to grow supersede their will to create value. In his book Does M&A Pay?, professor Robert Bruner wrote:

One must conclude that in the aggregate, abnormal (or market-adjusted) returns to buyer shareholders from M&A activity are essentially zero. A reasonable conclusion from these studies is that buyers essentially break even (i.e., that acquisitions tend to offer zero net present values...)

Zero net present values in the aggregate. I expect the Merrill deal would pull that aggregate down.

Is this really the worst stock of 2009?
Bank of America could actually turn out to be the best-performing stock in the Dow Jones Industrial Average between now and the end of the year. There is no question the stock is trading at depressed valuations. Before 2009, there is no instance of lower multiples in the Capital IQ data series, which goes back to the beginning of 1992.

(Of course, if we are measuring performance over the full calendar year, the stock has gotten off to a good start to winning the crown for Worst Stock for 2009 – as of last night's close, it’s already down more than 50% year to date.)

It’s your turn
Agree or disagree? Join the debate at Motley Fool CAPS by voting on whether you think B of A will outperform or underperform the market. At present, members' outperform picks outnumber underperforms by approximately 7:1 -- which side are you on?

More Foolishness:

Prudent by nature, Motley Fool Inside Value gave banks a wide berth in 2008. However, there are numerous sectors in which the bear market could spell opportunity in 2009 and beyond. Lower stock prices mean better future returns for those who have the conviction to invest in straightforward, well-run businesses now. The team at Inside Value can help you find those businesses. To find out their latest picks now, sign up for a 30-day free trial.

Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. Bank of America is a former Income Investor pick, and US Bancorp and JPMorgan Chase are current Income Investor recommendations. Berkshire Hathaway is an Inside Value selection and a Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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