Bank of America Is a Mess -- but Buy It Anyway?

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Oh, Bank of America (NYSE: BAC  ) . What in the world are we going to do with you? You're not in quite the shambles that Citigroup (NYSE: C  ) is, but JPMorgan Chase (NYSE: JPM  ) makes you look like the banking equivalent of Amy Winehouse.

Even analyst Dick Bove, a notorious banking bull, recently said that B of A's loan losses have been "horrific" of late and that the once-mighty bank may have to set aside $46 billion to cover losses in 2009. Of course, at the same time, Bove raised his price target for the stock to $19, or more than 40% above the stock's current price.

Wait, come again? Bove is highlighting the fact that the bank will be racked by losses but thinks the stock is a buy? In short, yes.

And he may not be so crazy. For most of the past decade, Bank of America's stock traded at between 1.5 and 2.5 times its book value. Currently, the bank's stock is trading at about half of the most recently reported common book value. Even if we were to fully back out those $46 billion in losses, the stock would still be trading under one times book.

Bove isn't alone in his optimism for the stock, either. Morgan Stanley (NYSE: MS  ) analyst Betsy Graseck recently bumped up her estimates for B of A to a Wall Street-high $2.54 for 2010 -- a call that got Jim Cramer so excited that he called B of A "perhaps the most compelling buy in the whole stock market today."

The devil's advocates
Of course, it's not very difficult to find folks at the other end of the spectrum. Economists like Nouriel Roubini and Robert Shiller both think that there is more pain ahead for both the housing market and the overall U.S. economy, both of which would hurt the prospect for higher bank earnings.

Famed banking analyst Meredith Whitney continues to be outspoken when it comes to the banking industry. While Citigroup tends to be her target of choice, she has highlighted multiple issues she believes will constrain earnings in the banking industry as a whole -- including rising unemployment and cuts to credit lines.

Uber bank bear Mike Mayo, who has been skeptical about banks for longer than pretty much anyone else out there, hasn't made any big waves lately, but I'm sure his view is still pretty dour. In his most recent splash, he suggested that loan loss levels in the banking system could surpass the levels of the Great Depression. He also slapped underperform ratings on B of A, Citi, JPMorgan, Wells Fargo (NYSE: WFC  ) , and a host of others.

So who's right?
Given the economic outlook and the challenges that still may be facing us, I find myself far less optimistic on Bank of America than Bove and Cramer. On the other hand, considering B of A's current valuation and the fact that nationalization seems to be off the table, I'm considerably more optimistic than Whitney and most of the other bears.

So for current shareholders (like myself), as long as the stock doesn't make up a huge chunk of your portfolio and you're willing to wait for the bank to get its act back together, hanging onto your stock may not be a bad idea.

However, for those on the sidelines wondering if they should buy B of A, my response is: "Why bother?" Bank of America is a huge company with a lot of unknowns, it's a very heavily followed stock, it has very opaque financials, and it has embattled leadership. And that's just to name a few glaring items. So why bother?

Many of the companies within the financial industry suffer from the same opaque financials as B of A, but many -- including JPMorgan Chase and Goldman Sachs (NYSE: GS  ) -- eliminate some of the other nasty issues that you pick up with Bank of America.

And thanks to the drop in the stock market, outside of the financial industry, there are barrels full of high-quality companies with easy-to-understand businesses, clear financials, and stocks that are trading at very reasonable prices. I could provide a pretty long list of these companies, but let's just say that a few years from now I imagine people will look back and say that stocks like UnitedHealth Group (NYSE: UNH  ) and America Movil were changing hands at some pretty attractive prices.

So be my guest and feel free to continue to follow the endless back-and-forth between the bull and bear analysts on Bank of America. But when it comes to taking the leap to actually buy the stock, why not just skip the headache of this company and go for the easier bargains that are out there right now?

Further Foolishness:

UnitedHealth Group is a Motley Fool Stock Advisor and a Motley Fool Inside Value selection. America Movil is a Motley Fool Global Gains selection. The Fool owns shares of UnitedHealth Group. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Matt Koppenheffer owns shares of the quagmire that is Bank of America, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...

Read/Post Comments (5) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2009, at 3:54 PM, catoismymotor wrote:

    BAC should be called the National Bank of America at this point. The federales have too much say in the business.

    LVS, WYNN, MGM are plays I could more easily live with than this bank.

  • Report this Comment On June 16, 2009, at 4:01 PM, Teacherman1 wrote:

    Good Article. It points out the rampant confusion in this market in general, with one "Pundificator" saying one thing, and another saying the opposite. While I think that B of A will in the future be trading back in the $40.00 to $50.00 range, in the meantime there will be a lot of ups and downs and twists and turns that are not for the faint of heart. Since I am in it at $4.63, I will just hold for now, but if something else catches my eye and I run short of cash, I am not adverse to taking some profits to take advantage of the latest "goodie" dangling from this crazy tree. I believe one has plenty of time to get in when things are more settled, and still make a good profit from it. Make sure you are willing to hold because it will be a while before reality (or at least the market's version of it) actually returns.Again, good article.

  • Report this Comment On June 16, 2009, at 5:28 PM, plange01 wrote:

    bank of america is a disaster and citi is a disgrace.there are plenty of other good stocks to buy in this market that are safer and have more upside and less down.

  • Report this Comment On June 16, 2009, at 6:19 PM, alexreising wrote:

    With BAC, I don't play balance sheet specifics I play the psychology surrounding this company and the market in general.

    I trade this stock weekly, buying on dips and using trailing stops to lock in profits and mitigate potential losses.

    I feel comfortable opening large positions in the stock because even if it tanks and somehow breaks through my stop loss order, I still like the company long term.

    At the end of the day there is no other financial institution with the sheer presence, image and earning power that this bank has. Anywhere I go I see a bank of america. Their retail branches alone are an earnings monster.

    For buy and hold investors I would recommend building into this stock on every significant dip all the way into the $18-20 range. 5 years from now you're going to be sitting on MASSIVE appreciation and your eventual dividend yields could be extremely high when measure against your low entry price.

    Think very short term and very long term and this company is a money making machine.

  • Report this Comment On June 17, 2009, at 10:46 AM, plange01 wrote:

    if nothing else bac is good for a short term trade on this recent dip in all bank share prices....just watch the hbac and key sized banks.....

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