Is Bank of America a Buy?

Bank of America (NYSE: BAC  ) has surged nearly sevenfold since its March lows. After this epic run, it's worth asking: Are shares getting ahead of themselves, or are they still worth buying?

The bank now has a $145 billion market cap, so the question should be whether it can stabilize and start to earn something in the neighborhood of $10 billion to $15 billion per year.

Could that happen? Anything could ... but I sincerely doubt it'll happen anytime soon. Excluding one-time gains and accounting sorcery, the bank is still losing gobs of money. Potential losses on existing assets are both real and menacing. Assuming that kind of profitability reminds me that some people may have downed one too many green-shoot aperitifs.  

But no matter: I'll play the bull's card today to try to prove a point.

To estimate B of A's earnings power, we have to look at the previous profits of its three parts: Vintage B of A, Merrill Lynch, and Countrywide.

Using average 2004-2006 earnings, here's what each segment was able to earn:

Segment

2004-2006 Average Net Income

Vintage B of A

$17.2 billion

Merrill Lynch

$5.7 billion

Countrywide

$2.5 billion

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

That's a total of about $25 billion ... not bad considering the $145 billion market cap!

But let's be real: 2004-2006 was nothing close to normal. Or rational. Or sustainable. It was a bubble. A big one. Real estate prices could find no top. Unemployment was 5%. Doctors got less respect than mortgage brokers did. Merrill Lynch was leveraged almost 20-to-1 and was the world's largest underwriter of collateralized debt obligations.

Those days are toast, thank goodness. It's only sensible, then, to take 2004-2006 earnings and trim them down to reflect today's reality.

By how much? When I look at nearly 10% unemployment, real estate prices that are still falling, credit card and commercial real estate exposure, and profits that were juiced by excessive leverage, a 40%-50% haircut doesn't seem unreasonable, even with synergies and cost savings. The fact that B of A is still losing money while interest rates are at zero should validate this contention.

With that haircut, we'll assume earnings of something like $12 billion to $15 billion a year when the smoke clears and the economy grows at "new normal" rates. This assumption is quite generous, and it's actually about twice what analysts expect it to earn in 2010.

But let's say it happens. The $145 billion market cap might suddenly look fair in the eyes of an optimist. It's close to the equivalent valuation at which rivals JPMorgan Chase (NYSE: JPM  ) , Goldman Sachs (NYSE: GS  ) , and Morgan Stanley (NYSE: MS  ) trade -- even though they're far healthier.

So everything's cool, right?

No.
B of A still owes taxpayers $45 billion, plus a few billion in warrants. CEO Ken Lewis has reiterated his intention to repay the money before he leaves his post (and many wish he would hurry it along), and he says repayment could start as early as this year. With executive-pay restrictions knocking at his door, though, he can be forgiven for wanting to rush this process through.

But where's that money going to come from? To maintain capital levels, it'll come either from earnings -- which would soak up several years of profits -- or, more likely, from issuing common stock. While it's impossible to know when or at what price stock sales might occur, one thing is assured: When it happens, it'll be severely dilutive to common shareholders.

So, sure: Wildly optimistic assumptions might make B of A look fairly valued in the eyes of optimists. But when you consider the obligation and urge to repay taxpayers as soon as possible, dilution could quickly turn what looks fair into something that's far overvalued.

And this all assumes that the opacity and accounting gimmickry that are standard in today's banking world don't turn B of A into the next Citigroup (NYSE: C  ) or AIG (NYSE: AIG  ) . If you think that's an overly dramatic statement, read through B of A's annual report and see whether you can truly decipher its balance sheet and understand how banks value assets. You'll see why this company enjoyed hiring people with Ph.D.s in physics.

Your turn to chime in
I realize this is a quick-and-dirty analysis fraught with assumptions, some of which you may think are totally nuts. So I'll hand this over to you. What do you think of B of A: Are shares a good buy or way overpriced? Take a moment to share your thoughts in our poll, or post your comments in the box below this article.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (68) | Recommend This Article (164)

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 August 07, 2009, at 2:32 PM, pdarby1420 wrote:

    BUY - YES, but it's all a matter of your timetable. If you bought in the >$25 range, sure dollar cost average your way to pofit; it will come.

    If your $$ cost average is low, say $5 or less, NAH you are already well ahead.

    For those inbetween, buy on dips.

    Yes, BAC is up a running ton this year, but remember it's down from the $55 high seen a few months ago AND that was prior to the multitude of mergers.

    Once the economy fully turns this machine will turnout profits in the $4-5B range quarterly - Mark my words.

  • Report this Comment On August 07, 2009, at 2:50 PM, mdk5068 wrote:

    For someone who has bought, and will continue to trade in BAC shares, the company is well worth the investment. The earnings power behind Merrill's private client and the overarching GWM portion are ridiculous. That is what BAC bought Merrill for. The GMI side is next to useless, bringing in less than 20% of profits. Bank of America has yet to even touch the private client side, because it is a self-propelled business. FA and client, that is it. No matter what way you look at it, Ken did the right thing in grabbing Merrill while he could. The future will only prove that Ken purchased an enormous engine that will pay off enormously soon enough. In the meantime, I have been content investing and nearly tripled my original investment in under a year. That is not bad, making it clear to me that BAC is a buy, and has nowhere to go but eventually up.

  • Report this Comment On August 07, 2009, at 3:03 PM, Lennonlives wrote:

    For some reason you failed to mention their position in Blackrock (which is not ownership) but is very handsome.

  • Report this Comment On August 07, 2009, at 3:06 PM, XMFRael wrote:

    Maybe first we should answer... buy the same analysis was BAC a short in the low single digits? A lot of smart people said yes. Now that BAC "has surged nearly seven fold"... i'm just glad i dumped all my stocks back in march when we nationalized the zombie banks...

  • Report this Comment On August 07, 2009, at 3:06 PM, mikecart1 wrote:

    Buying BAC was my 2nd greatest investment of the year behind ATVI. Those 2 investments make me feel like the smartest guy in the world... until I bought FAZ as well LOL!!!

  • Report this Comment On August 07, 2009, at 3:08 PM, plange01 wrote:

    i have been buying bac when it pulls back to $12.50 and under.i am a strong buyer of citi this one has a lot more upside..

  • Report this Comment On August 07, 2009, at 3:14 PM, thawkeye wrote:

    Sure BAC has had a good run up, but remember it had a disastrous fall that probably wasn't completely warranted. It may trade in a fairly tight channel for a little while, but the direction is definitely UP. There may be a brief pause in the climb, but that's to be expected. For the investor this is a good place to jump in and wait.

  • Report this Comment On August 07, 2009, at 3:24 PM, stockjock43 wrote:

    Bac could go to $20+ BUT its worth 10 bucks and will see 10 again for sure...a given

    It amazes me how analyst completely ignore the fallign home prices and increased foreclosures in RESIDENTIAL mortgages.... not to mention the other show in commercial going to drop...and credit cards? Ride th ewave but be ready to short this stock when the opportunity presents itself. I feel the BEST case scenario would be a trading range between 14 and 17 ...see the charts from the 1991 real estate crash...very similar . We had a huge drop in Bac to 4 bucks and then it went straight to 12/13 ish and traded in that range for 3 years ..I say this is a BEST case because back then their was not nearly the dilution nor the tarp and this real estate bubble is 3 times worse. I sell foreclosures and I assure you I will be selling them for at least 2 to 3 more years if not longer ..no time for spell check!

  • Report this Comment On August 07, 2009, at 3:27 PM, royshufly wrote:

    Q2 pre-provision income was $16 billion dollars, so over 60 billion run rate...you might want to reconsider your earnings potential

  • Report this Comment On August 07, 2009, at 3:29 PM, au90cu10 wrote:

    I am in the camp that US and global economies are

    not nearly as bad as the media portrays. We had

    a banking/credit mess, not a decline in demand as

    the leading causation. That being said, I think that

    BAC and other banks will find a perfect storm going

    forward have more to run ... thanks ... garce

  • Report this Comment On August 07, 2009, at 3:31 PM, mikecart1 wrote:

    stockjock43,

    I will bump this thread every week until it hits $10 which I think will never happen again for years to come. Let's see who is right! :D

  • Report this Comment On August 07, 2009, at 3:40 PM, thefoolkiller wrote:

    You fool--You shouldn't be allowed to write a column to influence other people's investments if you don't understand the simple task of analyzing a financial statement. One example--BofA does not need to raise additional capital--they've already done enough of this to more than satisfy capital requirements. They are sitting on a ton of cash--balance sheet cash is over $500 billion--and of this amount over $200 billion is available to play with (and can easily cover Tarp). And most importantly, they lose no capital when they repay tarp--tarp money is preferred not common equity and does not figure into capital requirement calculations. The only impact to the balance of repaying tarp is reducing cash and reducing preferred equity. You fools should be forced to retract the entire article since you are completely misleading people. By the war, BofA's reserves have been built to the point to where they are more conservative than almost all of the other large banks. Much of future writeoffs will be absorbed by these reserves and will not hit the bottom line (the bottom line is hit when the reserve is created in case you fools don't know that either).

  • Report this Comment On August 07, 2009, at 3:51 PM, TMFHousel wrote:

    "BofA does not need to raise additional capital--they've already done enough of this to more than satisfy capital requirements."

    I never say it's short of its capital requirements. I said it would need to raise capital to repay tarp and keep capital levels they same, which is true.

    "And most importantly, they lose no capital when they repay tarp--tarp money is preferred not common equity and does not figure into capital requirement calculations"

    Preferred capital *is* capital, and does factor into the capital calculations, particularly tier 1. If they lose no capital when they repay TARP, did they gain no capital when they received it?

  • Report this Comment On August 07, 2009, at 3:55 PM, thefoolkiller wrote:

    After reading his incredibly moronic analysis of Bof A, I was curious to see who Morgan Housel was. He's the guy who said on June 4, 2009 (in his Townhall Finance column) that the Dow could "easily" go to 5000. Quite the expert. Don't believe anything you read from these posers. Do your own research or listen to people that have earned people's trust over the years--not this fool.

  • Report this Comment On August 07, 2009, at 4:24 PM, Fool4Graham wrote:

    You're the fool "thefoolkiller". TMFHousel made a very clear case using the actual earnings of all three merged components of BofA using their wildly profitable years when credit was free and their leverage was high. If you adjust that earning potential by merely half, which is on the conservative side considering what I will list below, the stock would be wildly over-valued at $16. To actually think it could go higher and stay higher in the next year is pure fantasy, as soon as one bit of bad news deflates the euphoria it will burst the baloon.

    As for the bad news, it's that the toxic assets have gone nowhere, BofA is still holding hundreds of billions of it. The only thing that happened in Q1 that saved all these financials is that Congress leaned heavily on the FASB board to change the accounting rules for marking to market, and allowed financials to value the underlying securities at PURCHASE PRICE. Think about this for a second. If BofA has a slice of securitized mortgages it paid $1 for at the top of the market, and if it tried to sell that piece today the best it could get is 35 cents for the dollar, the accounting rule is letting it value that at the original $1. It's an insane accounting practice that came hand-in-hand at the same time as the "Stress Tests" were announced by Treasury, and lo and behold all the banks easily passed the tests once they raised a few billion.

    How long do you think they can hide those losses? That's how long the stock can stay at $16 or more. Sure, short term it can continue this wholly unsupported move up, but at some point even Bernard Madoff had to come clean, and at some point they will start disclosing these paper losses. This will trigger more far more capital reserve requirements than their current holdings--value their toxic assets correctly and this is barely a solvent company. Forget $16.

    I'm not even getting into all the rosy scenarios the current price is built on, and how it ignores the tsunami of coming mortgage defaults on Alt-A loans, ARM loans, credit card defaults and CRE defaults. Most of the foreclosures so far came from subprime loans that typically reset after 2 years. The Alt-As reset after four to five, like the typical Countrywide Specials we'd get here in SoCal.

    But don't listen to all this, go listen to the same idiots on CNBC and Jim Cramer who think this is over and we're about to turn the corner. I don't short generally because it's hard to predict when a correction comes and a company comes clean, but if I had to choose on BofA and you're long, I will very confidently take the other side of that bet any day.

    Basically BofA is priced for perfection, i.e. IF everything goes well from here on out, IF all the bad news is out and defaults are ebbing, THEN it is worth barely what it is already priced at today. On the other hand if a single piece of the bad news comes out, it will take a tremendous and quick beating. The runup to $16 is part of the larger bear market bounce we're seeing in financials, people have lost a lot of money over the past year and are desperate to hallucinate the good times back . . . as if all those toxic assets just disappeared. They're still there. And the foreclosures are coming.

  • Report this Comment On August 07, 2009, at 4:27 PM, TMFBrich wrote:

    foolkiller,

    Two points of clarification:

    1. The June 4 column was not a "Townhall Finance column"; it was a Fool.com column that, because of a distribution deal, was hosted on Townhall.com. We have many such deals to syndicate and share content.

    2. You're misrepresenting the June 4 column. Key excerpts:

    <<Assuming earnings stay flat, revisiting those historically low levels could easily mean a 50% decline from here. For the Dow Jones Industrial Average, that could easily mean Dow 5,000, or worse. Now, I'm not predicting, warning, or forecasting -- I'm just taking a long look at history. …

    As difficult as it is right now, following the "this too will pass" philosophy really does work. No matter how bad it gets, things will eventually recover. … Think about the best times you could have bought stocks in the past: after the economy recovered from oil shocks in the '70s, after the magnificent market crash of 1987, after global financial markets seized up in 1998, and after the 9/11 attacks that shook markets to the core. As plainly obvious as it is in hindsight, the best buying opportunities come when investors are scared out of their wits and threaten to give up on markets altogether. And that's just about where we've been over the past few months.>>

    So, rather than predicting doom and panic and Dow 5,000, Morgan was actually advocating that investors get into stocks.

    I like disagreement and debate, but ad hominem attacks aren't of much use.

    -Brian Richards, Fool editor

  • Report this Comment On August 07, 2009, at 5:37 PM, MKArch wrote:

    I think in the just released NON BUBBLE ECONOMY Q2 earnings BAC reported $14B pre tax pre provision so you might want to re-visit your new norm assumptions.

    After Timmy changed the rules in the middle of the game forcing BAC to raise $34B+ cash on top of the $45B in TARP prefered shares that Timmy decided no longer count toward their capital requirements they can now buy back up to $34B+ of the government preferreds without affecting common equity and their Tier 1 ratio is so high due to the addition of $34B on top of the $45B they can afford the hit there. That's why Lewis insists they can pay TARP back and he would be right if they weren't in the Fed's dog house.

  • Report this Comment On August 07, 2009, at 5:47 PM, TMFHousel wrote:

    "$14B pre tax pre provision so you might want to re-visit your new norm assumptions"

    When you exclude one-time gains from selling CCB shares, B of A would have lost over $6 billion in the second quarter.

    http://www.fool.com/investing/general/2009/07/17/the-great-b...

  • Report this Comment On August 07, 2009, at 5:53 PM, mikecart1 wrote:

    This is Wrestlemania up in here.

    TMFMembership vs. TMFHousel

    LOL

  • Report this Comment On August 07, 2009, at 5:54 PM, thawkeye wrote:

    Boy, there are a lot of "the glass is half full, but that's okay because the sky is falling" mentalities around, aren't there.

  • Report this Comment On August 07, 2009, at 5:56 PM, jesse2159 wrote:

    BoA will make money in the future, but I simply do not have the stomach to invest in any business that lies, cheats and steals. Investors need the moral backbone to refuse to allow preditors roam freely. BoA has shown it's mantle by raising interest rates on credit cards, closing accounts and cutting off credit to their own customers when the US taxpayer lent them $45 billion to help the economy.

  • Report this Comment On August 07, 2009, at 6:27 PM, VegasMartin wrote:

    I'm staying away from this stock. It's a high-risk, high-reward play and it's potential upside isn't worth the risk to me. Even though the economy has shown signs of improving, it's still very, very bad. Although I'm bullish over the long term, the recovery will take longer and the recent run up was too much, too soon, especially in the financial sector.

    www.ShootTheBears.com

  • Report this Comment On August 07, 2009, at 6:28 PM, MKArch wrote:

    <<<When you exclude one-time gains from selling CCB shares, B of A would have lost over $6 billion in the second quarter.>>>

    -------------------------------------------------------------------------

    Page 4 pre tax, pre provision $16.1B net out both the one time gains and expenses you get $14.26B. The analyst (Mike Mayo?) who thinks we are in for 11%+ unemployment (hardly a BAC chearleader) brought this up in the cc and seemed pretty impressed.

  • Report this Comment On August 07, 2009, at 6:32 PM, Fool4Graham wrote:

    "I think in the just released NON BUBBLE ECONOMY Q2 earnings BAC reported $14B pre tax pre provision so you might want to re-visit your new norm assumptions"

    Don't you read anything other than BofA's press releases or CNBC? I urge you to check Calculated Risk and other blogs that dig deeper and that actually saw the whole meltdown coming. They are all very skeptical about Q1 and Q2 which is full of one-time credits and accounting shenanegans that defer the losses. The happy talk you hear now is coming from the same financially illeterate press sources that missed the entire meltdown, why would you listen to these same idiots that now say the worst is over. Better yet, tell me where on earth the toxic assets went. Nowhere. They just changed the way they can account for it, but the write-downs are going to have to be made and it will take over a year to be done with it. No way can they even match the past Q earnings again, let alone assume the aggressive growth that the current $16 price prices in.

  • Report this Comment On August 07, 2009, at 6:34 PM, MKArch wrote:

    http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...

    Sorry forgot the link. Page 4. Also your reference to BAC losing money if you exclude one time gains (you don't seem to concerned about one time losses) misses the point of the bullish analyst that current earnings are meaningless. BAC is going to make it through the rest of the recession with minimal additional dilution if any and normalized earnings will be pretty powerful on the other side.

  • Report this Comment On August 07, 2009, at 6:49 PM, madisonmarbles wrote:

    In San Diego, we have noticed a very peculiar thing lately...the housing market is in a frenzy. The supply of homes is down to about 3 months, last I checked. I have offered on 6 homes in the last 3 months, 3 of those offers being full list price, conventional loan, 20% down, well qualified, yadda yadda. Yet none of my offers have been accepted. Every house I have been interested in has multiple (up to 30!) offers on it. I routinely see homes sold the day they hit the MLS.

    Why is this happening? Because the banks are holding off on foreclosures and artificially shrinking the supply, which is dramatically driving up the prices and feeding the frenzy. Why the banks would do this is obvious.

    But what's interesting here is how long will they be able to do this. With all of the TARP funds, banks were let off the hook in terms of having to raise capital the old fashioned way, sell assets. Without the TARP funds, banks like BOFA would have had to unload many more mortgages than they have. And that would have meant much greater losses than they are currently reporting.

    So the big question is, how long can BOFA hold off on foreclosures and avoid the massive write downs on these properties. Can they hold out long enough for prices to get back to their 2005 levels?

    Me thinks not. At some point the write downs are going to happen. Hopefully no more TARP means this will happen sooner rather than later and we will see a more accurate assessment of BOFA health, or lack thereof.

  • Report this Comment On August 07, 2009, at 7:03 PM, Alwayzwrong wrote:

    Buy BOA? Sure. Don't buy BOA. That'll be fine.

    Why should anyone feel so strongly either way? Personally, there are much better investments out there.

    And there are worse investments, as well.

    If I say that BOA seems to be a middling investment, I'll probably offend everyone. For that, I apologize.

  • Report this Comment On August 07, 2009, at 9:13 PM, ethicscop wrote:

    I liked Ford @1.23 AIG @.38 and BAC @5.00

    I fear you will have to wait years to make any money

    @ its current level.Oh thats if they do not step in any

    #####.One more mistake and they are done.

  • Report this Comment On August 07, 2009, at 10:25 PM, jokr1963 wrote:

    I bought the stock at around 4.00 and sold it. then I bought it at about 6.00 and sold it. Then I bought at 9>32 and sold it at 17.50. I wish all of you wouyld just shut your mouth and do something that is profitable. Hey it is a good stock but I invest and sell and don't worry about it. I does what it does and I don't try to figure it out that mush but those that try to figure it out are a loser. so go figure and but what you want and make some money

  • Report this Comment On August 07, 2009, at 10:26 PM, Hans106 wrote:

    It's, as history shows, always a good idea to buy financels in a recession, as long they do not go bust. But the best time of the recovery is over. I think the BoA shares have still room to run for two to five years.

  • Report this Comment On August 08, 2009, at 12:04 AM, carolina1954 wrote:

    The bad news about BofA is also the good news: it is overwhelmingly a consumer bank, so its credit costs escalate alarmingly going into a recession, but plummet when the economy resumes growth. BofA reduced its pretax earnings by $6.4B in Q1 and another $4.7B in Q2 of 2009 for credit reserve “builds” to cover potential future loan chargeoffs. Its total provision expense, including these reserve builds plus actual chargeoffs, was $13.4B for each quarter. Reserve builds are related to the trend in non-performing assets (NPA), which have been escalating rapidly during the recession, but at a slower rate of increase in Q2. BofA’s early stage loan delinquencies actually fell in every major loan category in Q2, indicating that NPA’s will likely stabilize by Q4 of this year or Q1 of 2010. When NPA’s stabilize, reserve builds will drop to zero, meaning that quarterly provision expense will equal actual loan chargeoffs. Cessation of reserve building will add several billions to BofA’s quarterly pretax earnings, beginning in Q1 or Q2 of 2010.

    In addition, actual loan chargeoffs are now at extremely elevated levels, but, following the NPA trend, will also likely peak in late 2009 or early 2010, and decline steadily thereafter for many quarters. By the end of 2010, declining chargeoffs could also add billions to BofA’s quarterly earnings. This improving pattern of loan-loss behavior is quite predictable, assuming the recession is now ending, which seems increasingly probable.

    The result is that BofA has a potential earning power of >$3/sh, which could be realized as early as 2011, and be substantially anticipated in the stock price next year. This explains why some highly regarded analysts, such as Betsy Graseck (Morgan Stanley) and Richard Bove (Rochdale Securities), predict that BofA’s stock price will eventually regain its pre-crisis level in the $50’s. (Graseck’s mid-2010 price target is $30).

    Anyone who thinks these projections are farfetched should ponder the experience of the early 1990’s bank crisis, when money center bank stock prices collapsed to single digits, due to recession, energy crisis, taxpayer bailouts, huge loan writeoffs, forced capital raises, and insolvency fears—sound familiar? When the economy improved, bank losses quickly evaporated and share prices exploded as much as 5x or 10x over a period of a few years.

    --C. David Kirby

  • Report this Comment On August 08, 2009, at 2:18 AM, RaymondWaliany wrote:

    Steep rise up of the bank stock with no apparent reasons seems scary. Banks and the regulatory agencies have not learned anything from the mistakes and on top of that the exucitive pay is still in millions.

  • Report this Comment On August 08, 2009, at 8:46 AM, multi007 wrote:

    Great artical. I was risky enough to buy BAC in at $5.25/share. I also got CITI at $3, CIT group at $1 and HIG at $12. I felt like I was a firefighter. When people were running away from the market in March, I was runing TOWARDS it.

    Off topic: I dont know why, but for the first time in my life I listened to Cramer in September 08 when he annouced to go 100% cash. I did. As a 30 something year old, that was THE BEST advice I have ever acted on. And as a 30 something year old, I got back in March 09 because I figure, "great entry point even if the market goes down 10% more from here. Got plenty of time..."

    I use a plethera of sources for research. Fool, Cramer, Fast Money (tv show), Investors Business Daily. I am thinking on subscribing to a few of Fools' research tool like hidden gems but right now, im doing just fine.

  • Report this Comment On August 08, 2009, at 9:03 AM, MKArch wrote:

    Thank you C.David Kirby, outstanding post. What say you Morgan?

    Mike

  • Report this Comment On August 08, 2009, at 11:34 AM, PromasterX wrote:

    Load up on CITI next. Bac at 5.80, and up 168%. Forgive all the perma-bears who will try to scare you, half of them are not even in the market.

  • Report this Comment On August 08, 2009, at 1:00 PM, Pat999 wrote:

    The fool lists JPM's P/E ratio of 123.5 so how can you say that BAC's P/E (46) is comparable to JPM's?

    They (BAC) already (reluctantly) issued 17 billion dollars in new common stock a few months ago. That issuance has been completed and has already been priced in. Considering that offering I highly doubt they'll be issuing another 45 billion to pay back TARP.

    Once the economy turns around (and it will) the combined earnings power of BAC, Merril, and CW will be enormous. Add in the appreciation of BAC's balance sheet as the economy recovers, and I don't think the estimate of 25 billion in earnings will be that far off. Especially after they can save 713 million/quarter in TARP dividends.

    Btw, AIG made money Q2.

  • Report this Comment On August 08, 2009, at 2:06 PM, fcharger wrote:

    All I know is that when you recommended the sale I sold 11,000 shares at 6.24. You have cost me over $100,000 which makes your stupid service the most expensive service of any kind I have bought in my life.

  • Report this Comment On August 08, 2009, at 5:08 PM, MTheory wrote:

    All investments in banks should no longer be viewed as investing in banks - it is investing in hedge-funds. Regulations restrict investment in hedge-funds to "sophisticated" investors, but since big "banks" (hedge-funds) are are the functional equivalent, that restriction no longer applies. The only difference is that operationally, they get cheaper money from the Fed. They are also back-stopped by the taxpayer now. The economic model of converting the banks of America to hedge-funds may not be sound, but so far it has not been discussed much.

  • Report this Comment On August 09, 2009, at 10:39 AM, whitethroat wrote:

    Have to say I agree that the original article could have been better. When the stress tests results were released the gov. said that BAC's Tier 1 capital levels were OK, but that the TCE levels were too low. Tier 1 includes preferred stock (the gov. TARP 45 billion) and TCE does not. Since then BAC has raised at least 40 billion in common equity, which gets counted in both the TCE and Tier 1 columns. As I understand it, BAC is continuing to raise capital through Q3. So, if the gov capital requirements are the same as they were at the time of the stress test--and this is a big if and possibly no-one knows yet--BAC could repay TARP and the Tier 1 levels would be as high as they were this spring when the gov said they were OK. It is worth noting that BAC has already had to dilute shareholders at ruinous prices for questionable results. Tom Brown, the bank expert from Second Curve Capital who has often been a big critic of BAC, has a good general article on the stress tests and thinks banks are over capitalized:

    http://www.bankstocks.com/ArticleViewer.aspx?ArticleID=5942&...

  • Report this Comment On August 09, 2009, at 3:15 PM, LoneWolf888 wrote:

    All this unnecessary haggling..A waste of time and effort..People who analyze on fundamentals are relics of the distant past. Today's market is totally manipulated..Dark pools, nano-second trading, insane derivatives, no mark-to-market parameters,

    omnipresent, evil-empire aka: Goldman Sachs, etc etc etc..Bottome line : if BAC and or C continue their absurdly overvalued trajectory it will be because the miscreants of Wall Street are putting their billions into these stocks, not because you Fool followers can interpret "financial (mis)statements. Investors in these dogs will either be lucky or unlucky depending on the Wall Street manipulators..Don't flatter yourselves !

  • Report this Comment On August 09, 2009, at 3:32 PM, LatifK wrote:

    I do agree, this bickering over the valuation of BAC is pointless, its worth what the market is willing to pay for it at that given time, no less and no more.

    Anyhow, what is important is the large transfer of wealth happened and now its over, GS and the other Investment banks raked in windfall profits on the backs of slow moving 401k's and pension funds.

    When you look at your 401k statements and wonder where all that money went, just read the Q1 and Q2 statements from GS and JPM it's in there.

    These huge transfers of wealth happen on an almost clockwork basis dating back to the markets inception and its the same cast of characters in the same old play.

    In GS we trust, all others must pay cash.

  • Report this Comment On August 09, 2009, at 8:01 PM, denim599 wrote:

    People know me well on google board for calling BAC prices in the past..when BAC was trading around 7's in April..i said $14 in May 09.. I was subject to lot of bashing for calling that back then....

    Well, on May 7th..it touched my estimate and tested $15. A recent call that BAC would test $16 in July 09 before July OE..got a bit extended and tested $16 on Aug 05.

    I've been saying BAC will test 20's in August since April 09 and I am confident it will happen soon. I don't really care what Analysts say ...(not trying to bash anyone in particular). I do my DD and I see BAC soon in 20's. If you are long on BAC, I think you shouldn't risk selling all your positions expecting a major pullback. Maybe, take some profits and wait for a small pullback..(but, there is a good chance that pullback may not happen the way you expect).

    Good Luck Folks..

  • Report this Comment On August 09, 2009, at 8:07 PM, conrod10 wrote:

    AFTER ALL THIS DISCUSSION, SHOULD I BUY BAC OR NOT?

  • Report this Comment On August 10, 2009, at 12:23 AM, mikecart1 wrote:

    BAC will be in the 50's by 2010. Should you buy BAC or not? Well it doesn't take a genius to figure that one out.

    You heard it here first. :)

  • Report this Comment On August 10, 2009, at 2:21 PM, hilary57 wrote:

    If BAC appears to be so dicey for the writer of this article, I'm just curious why Morningstar gives it a 3 star rating along with Wells Fargo and other sound U.S. banks? This may sound naive or over simplified but I just bought a bunch of BAC and I thought I did my homework prior to the purchase. I needed some financials in my portfolio and BAC seemed like the perfect pick. (Also bought some USB).

  • Report this Comment On August 10, 2009, at 2:26 PM, mikecart1 wrote:

    hilary should of bought AIB instead of USB.

  • Report this Comment On August 10, 2009, at 5:15 PM, vishtr wrote:

    American Bank

    When will your stock stop rising?

    I think it is soon.

    -vishtr

  • Report this Comment On August 10, 2009, at 5:46 PM, Fool4Graham wrote:

    "hilary57 wrote: If BAC appears to be so dicey for the writer of this article, I'm just curious why Morningstar gives it a 3 star rating"

    Morningstar? Really??? You're going to quote Morningstar??

  • Report this Comment On August 10, 2009, at 6:14 PM, mikecart1 wrote:

    ""hilary57 wrote: If BAC appears to be so dicey for the writer of this article, I'm just curious why Morningstar gives it a 3 star rating"

    Morningstar? Really??? You're going to quote Morningstar?? "

    Don't make fun of her, she is new!

  • Report this Comment On August 10, 2009, at 10:32 PM, mcmetal wrote:

    There are only 2 reasons to be bearish on BAC right now. You are either short the stock, or itching to get in on a pullback.

  • Report this Comment On August 11, 2009, at 9:23 AM, pshesse wrote:

    I bought a 1000 shares at $7.80 and sold 500 at close to $15.50. I don't have a clue and now I am just along for the ride.

  • Report this Comment On August 11, 2009, at 12:26 PM, Levifan wrote:

    I feel uneasy about the common stock, so I bought the Preferred J stock. It paid over 20% when I bought it, now it is more like 9%. I am sitting on a good dividend stock and have more than doubled my investment. I also sleep at night.

  • Report this Comment On August 11, 2009, at 3:19 PM, stockjock43 wrote:

    stockjock43,

    I will bump this thread every week until it hits $10 which I think will never happen again for years to come. Let's see who is right! :D

    Well NEVER say NEVER my friend...It has hit 4 bucks or less during the last 2 crashes yet you say it will never hit 10 again... maybe it wont this cycle ( I think it will when the credit cards default and the res/commercila loans get a lot worse ) but you can bet your ass there will be another crash and it will sell off to 10 again...when? That I cannot say or I would be very rich indeed

  • Report this Comment On August 11, 2009, at 7:10 PM, mals wrote:

    I bought 500 shares of BAC at $3 as pure speculation. The odds were still better than lottery tickets. My gain is 500% as of today. Should I just keep it for the long haul or sell it and take my profits?

  • Report this Comment On August 12, 2009, at 2:25 PM, plange01 wrote:

    bac is a exellent buy and in spite of its rise it will still more than double in a year. its rival citigroup at this price is a steal .citi in a year will be up..700-900%...while that percentage looks big i bought car in jan and sold it 8/11 for 950% gain.i also own c and bac.in these once in a liketime markets huge gains and losses are a everyday affair...

  • Report this Comment On August 13, 2009, at 11:35 AM, Teacherman1 wrote:

    All have valid points and arguments, but since none of us have a "real" crystal ball, we have to go with our own beliefs and expectations. I am long BAC, but since I got in at under $5.00, I am not exactly at risk. One question, anyone think that John Paulson is a fool? I realize he could just be playing for a short term rise, and be out as quickly as he got in, but remember every time it goes up $1.00, he makes $158 M, and every time it goes down $1.00, he loses $158M. I think I will continue to ride this and see where it goes. JMO and worth exactly what I am charging for it.

  • Report this Comment On August 14, 2009, at 1:57 PM, EsperanzaHope wrote:

    What madisonmarbles is seeing in CA is happening here in AZ. I am a real estate broker and I know the banks are up to no good when it comes to hiding how many homes are in foreclosure and what they will write off in the future. This cycle of people being upside down (underwater) in their mortgage will continue as long as the assets don't appreciate. Also no one want to talk about the losses in the commercial real estate area. I don't believe the government's stress tests--they are trying to avoid a panic--but there is more bad news to come from this sector for sure. There will be a new wave of people walking away from their mortgages--the ones that "just choose to walk away". This mess in the housing market is not over and it may be 2 years before it cleans it self up--maybe longer if the banks keep hiding the foreclosures. By the way, how is this ecomony going to grow without jobs?? Try answering that question.

  • Report this Comment On August 14, 2009, at 3:57 PM, multi007 wrote:

    mals - Im my opinion, if you think you can do better elsewhere, then sell and take profits. If not, then let it ride - that is unless you NEED the money.

    The "Cramerican" rule would be to sell 250 shares, lock in a profit and let the rest ride. Im a long term investor so im letting it ride till it hits $60.

  • Report this Comment On August 14, 2009, at 6:23 PM, Dadw5boys wrote:

    The banks are trying to break Obama that is all.

    Look at this page 23. $ 77 Trillion in bad paper ? Is that good or bad for BOA ?

    See if any of the banks are a buy period or even a hold.

    http://www.occ.gov/ftp/release/2009-72a.pdf

  • Report this Comment On August 14, 2009, at 6:32 PM, EvergreenII wrote:

    Friends, why not just consider buying the stock and also buying protective puts. If the stock goes to the mid-20's or higher, you won't care that the puts expire worthless. And if the stock goes to single digits, you're protected...

  • Report this Comment On August 14, 2009, at 9:08 PM, johnboy1946 wrote:

    Just sold all 3000 BAC shares today. The shoe HAS to drop on this one soon.

  • Report this Comment On August 14, 2009, at 11:53 PM, RedneckEconomist wrote:

    Forget the bankruptcy's and the falling home prices. That has nothing to do with the condition of the financial industry. What matters, are the idiots at the Federal Reserve and their actions to increase interest rates in 2006-2008, followed with the rapid drop to -0- % in early 2009. The Fed caused the colapse of the financial industry in 2008 and the remaining members are now profiting from the 0% interest ceiling. My friends this is Eco 101. Consider the 80-20 rule. We all know it. 20% of our world causes 80% of the problems. As far as BAC is concerned, I bought 10,000 shares @ $4.02 and will sell when Burnachi and his idiots start talking about recession recovery and (Oh my gosh!!! Inflation). Until then BAC will continue to show handsome profits and ROI because of the hocus-pocus mark-to-market accounting rules. If anyone is investing in anything out more than 30 days, there nuts.

  • Report this Comment On August 15, 2009, at 12:16 AM, ARJTurgot wrote:

    Anybody notice that these guys aren't particularly good BANKERS? The future of this outfit is purely speculative. There are GOOD companies out there right now at reasonable prices. BofA ain't one of them.

  • Report this Comment On August 15, 2009, at 1:02 AM, MisterBruce wrote:

    I'm with you johnboy, Bought a little while back, got a 75% return, and now I dumped mine too. This whole rally is suspicious. Who really knows, but you might as well take advantage of it, trick is trying to tell when to get out in time.

  • Report this Comment On August 19, 2009, at 6:22 PM, stockmenot wrote:

    To Alwayzwrong

    I think you might be living up to your username by saying that B of A's success or failure is not that important. If there were a correction in their stock price, and it was because they were less than truthful, then the whole market would suffer. So I think if your attitude is "Que Serra, Serra", then you are not really investing in stocks, or you are doing it blindly.

  • Report this Comment On August 19, 2009, at 6:24 PM, stockmenot wrote:

    And to Redneck....You are absolutely right & it looks like the rednecks have the sense.

  • Report this Comment On August 25, 2009, at 4:18 PM, boweslyons wrote:

    Denim, stay with the google board, you won't make it here. http://finance.google.com/group/google.finance.662744/browse...

  • Report this Comment On August 29, 2009, at 12:05 PM, tcsonic wrote:

    I love to listen to Bears try to churn up bad news. Only the obvious was written in this article. I am glad to see FoolKillers initial response, because if the author had used the balance sheet, in conjunction with, ALL Of the explanations in the earnings call... anyway I have a different opinion on BAC.

    It is not a steal today at $17 but it has the CASH TO PAY OFF TARP many times over. I hope Ken Lewis is still there in 2012-13, when the worst of the mortgage crisis will finally be behind us, then he will be able to hand over the cash with confidence. For those short term investors, I don't care about what you have to say:)

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