The Worst Stocks for 2010: Bank of America

As we endeavor to fulfill the promises we make to ourselves each time a new year dawns, I am reminded of the Classical Greek recipe for health: a sound mind in a sound body. You are responsible for the physical part, but Fools constantly join forces to stretch their minds through the open exchange of ideas.

Accordingly, I ask only for your openness as I explain why I have selected Bank of America (NYSE: BAC  ) as my nomination for the worst stock for 2010.

The compulsion to recuperate investment losses supports an understandable level of optimism that the financial crisis may have peaked, that recovery is well underway, and that shares of major financial conglomerates like Bank of America have now rejoined the ranks of suitable investment vehicles. Countless politicians and media outlets certainly appear eager to promote such a perspective.

I submit that available evidence does not support that common set of assumptions, and I reiterate my longstanding concern for investors heavily exposed to the financial sector.

Not really investment-grade
Speculation within the financial realm refers to the more risk-laden avenues to possible gains (or losses), and like some small portion of speculative plays will do, Bank of America shares have seen more than a 500% nominal increase from the worst levels of 2009. Meanwhile, along with the oft-forgotten rounds of shareholder dilution, obstacles to profitability and stability appear as numerous today as they were when my colleague Alex Dumortier nominated Bank of America as the worst stock for 2009. Unprecedented fiscal interventions and stimulative injections have helped to spur shares along during 2009, but I see indications that 2010 will see a return to valuations that finally take risk and structural impairment into proper account.

Non-financial definitions of speculation focus more on the role of conjecture or incomplete evidence in rendering an opinion. In this broader sense of the term, exposure to Bank of America shares equates to speculation because it ignores an overwhelming body of evidence pointing to a broad continuation of the financial crisis, specifically:

  • The wiggle-room afforded to financial institutions in calculating the carrying value of illiquid derivative "assets" continues to mask the true scale of financial impairment from the eyes of investors.
  • The $600 trillion global market for derivatives has not changed structurally since we witnessed the historic near-demise of insurers like AIG (NYSE: AIG  ) and monoline specialists like Ambac Financial (NYSE: ABK  ) .
  • Ratings agencies can't be trusted to appropriately gauge risk. The historical record on this point speaks for itself.
  • From its inception, I have viewed TARP as a mass distraction from the much larger scale of total backstops, asset transfers, and liquidity injections afforded to financial corporations. Although Bank of America has repaid $45 billion to TARP, and terminated a $118 billion backstop, the Federal Reserve has not abandoned its goal to purchase $1.25 trillion in mortgage-backed securities by March 2010.
  • Credit risk has not bottomed. Rising foreclosure rates, credit card delinquency rates, persistent distress in the labor market, and deterioration in commercial real estate loans tell a staunchly contrarian story.
  • A full decade of gargantuan budget deficits -- combined with an assurance by precedent that unlimited sums of capital will be allocated or printed as required to forestall further deleveraging -- makes further expansion of fiscal imbalances an extremely plausible scenario.
  • The U.S. dollar hasn't a fundamental leg to stand on. Frankly, expectations for long-term stability of purchasing power from the world's de-facto reserve currency simply overlook a preponderance of evidence to the contrary.
  • In short, I view sustainable recovery in the U.S. financial sector as a fantastical fairy tale based upon forestalled deleveraging. Only time can confirm my claim, but increasing consumer loan losses revealed last week by JPMorgan Chase (NYSE: JPM  ) continue to point in an unfortunate direction.

Why single out Bank of America?
The evidence cited above is common to the financial sector at large, and has ramifications for other sectors including homebuilders like Toll Brothers (NYSE: TOL  ) or Pulte Homes (NYSE: PHM  ) . If consumer discretionary spending contracts as I foresee, my 2009 selection of Best Buy (NYSE: BBY  ) could become the worst buy. But I have simple reasons for singling out Bank of America as the worst of the worst.

As I look back, no company in my view matches the pure abandon with which growth initiatives proceeded even as the wheels fell off the housing sector. Late in 2007, the company aggressively expanded its loan portfolios with ramped-up exposure to consumer and commercial loans, and pounced upon Countrywide Financial with its mountain of toxic mortgages. Just a few months later, the company's private proposal to Congress requesting a $739 billion bailout for the industry became public. The baffling disconnect between such actions, and a nearly simultaneous plea for help, invited speculation to connect the dots. Prior to the collapse in share prices, I issued a dire warning to Fools to run to the nearest exit.

These many months later, I see a management structure that has been shaken but not stirred. I see a scale of exposure to toxic assets that has only been exacerbated by the ill-fated Merrill Lynch acquisition, and I take note of an exceedingly accommodative fiscal environment combined with bearish macroeconomic indicators that virtually guarantee another round of deleveraging in the making. Add to this the specter of a proposed punitive tax that would place Bank of America on the hook for about 22% of estimated 2010 earnings, and Bank of America shares are simply unfit for risk-averse capital.

If you are more attuned to the facts on the ground than the word on the street, then cast your vote for Bank of America as the worst stock of 2010, and share your perspectives in the comments section below.

What do you think is the worst stock for 2010? See the rest of our contenders and cast your vote!

One simple way for investors to defend themselves against domestic weakness is to look abroad. The Motley Fool Global Gains newsletter team is constantly scouring the globe to identify investment opportunities for Fools who wish to diversify out of the domestic markets, and it's ready to share its findings with you.

Fool contributor Christopher Barker thinks derivatives are a dirty word. He can be found blogging actively and acting Foolishly in the Motley Fool CAPS community under the user name TMFSinchiruna. He tweets. He owns no shares in any of the companies mentioned. Best Buy is a Motley Fool Inside Value and a Motley Fool Stock Advisor recommendation. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days.

The Motley Fool's disclosure policy has zero exposure to derivatives.


Read/Post Comments (10) | Recommend This Article (26)

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 January 21, 2010, at 1:30 PM, pondee619 wrote:

    "worst stock for 2009" Where is the score card ofr this article published?

    Let's try this:

    Worst Stock for 2009: Ford

    By Matt Koppenheffer

    January 28, 2009

    http://caps.fool.com/Ticker/F/Chart.aspx Ford up close to 450% S&P up 35-40% FORD wins

    Worst Stock for 2009: Citigroup

    By Morgan Housel

    January 28, 2009

    http://caps.fool.com/Ticker/C/Chart.aspx Citi down S&P up 35-40% FOOL wins

    Worst Stock for 2009: Starbucks

    By Rick Aristotle Munarriz

    January 28, 2009

    http://caps.fool.com/Ticker/SBUX/Chart.aspx Starbucks up150+% S&P up 35-40% STARBUCKS wins

    Worst Stock for 2009: Blockbuster

    By Rich Smith

    January 28, 2009

    http://caps.fool.com/Ticker/BBI/Chart.aspx Blockbuster down 60% S&P up FOOL wins

    Worst Stock for 2009: Best Buy

    By Christopher Barker

    January 28, 2009

    http://caps.fool.com/Ticker/BBY/Chart.aspx Best Buy by a nose. Call it a DEAD HEAT

    Worst Stock for 2009: Hovnanian Enterprises

    By Rich Duprey

    January 28, 2009

    http://caps.fool.com/Ticker/HOV/Chart.aspx Hovnanian Enterprises up 135+/-% S&P up 35/40 % HOVNANIAN Wins

    Worst Stock for 2009: Panera Bread

    By Alyce Lomax

    January 28, 2009

    http://caps.fool.com/Ticker/PNRA/Chart.aspx Panera up 50% PANERA wins by more than a nose

    Worst Stock for 2009: Sears Holdings

    By Tim Beyers

    January 28, 2009

    http://caps.fool.com/Ticker/SHLD/Chart.aspx?source=icasitcht... SEARS up 125% SEARS wins

    Worst Stock for 2009: Sirius XM Radio

    By Jim Gillies (TMF Canuck)

    January 28, 2009

    http://caps.fool.com/Ticker/SIRI/Chart.aspx SIRI up 500 +% SIRI wins

    Worst Stock for 2009: Bank of America

    By Alex Dumortier, CFA

    January 28, 2009

    http://caps.fool.com/Ticker/BAC/Chart.aspx BAC up 130/140% S&P up 35-40 % BAC wins

    Let us re-cap WORST STOCKS that beat the S&P BAC, SIRI, SEARS, PANERA, HOVNANIAN, STARBUCKS & FORD.

    WORST STOCKS that lost to the S&P Blockbuster & Citigroup.

    One stock I'll call a dead heat Best Buy.

    Come on, Guys. You were to be writting about the WORST STOCKS of the up-coming year. 7 Beat the market, 2 lost to the market and 1 was a market performer.

    Are these "articles" contra indicatiors?

    Tell me why we should take this series of articles seriously. The "brain trust" of Fooldom got beat 2-7-1. And this was on articles picked to be the WORST. Not just stocks that MAY be bad, these were touted to be the WORST in the up coming year.

    Any fool defenders?

  • Report this Comment On January 21, 2010, at 1:30 PM, pondee619 wrote:

  • Report this Comment On January 21, 2010, at 1:52 PM, RussMillennium wrote:

    I agree..this article has no sense!!

    but i want a job like this...where you get payd to write silly things!!!!

  • Report this Comment On January 21, 2010, at 4:11 PM, XMFSinchiruna wrote:

    Russ, A little more specificity with your retort might be in order. :)

    One Fool's "silliness" is another Fool's gold.

  • Report this Comment On January 21, 2010, at 5:12 PM, marc5477 wrote:

    I dont think we should base performance of any given author based on 2009 results. Most stocks rose for no other reason than the fact that they got walloped late 2008. Furthermore, most article like these take time to research and probably were written a few weeks before publication. Thus, is you actually look at those companies based on Jan 01, 2009 time frame you will note that many did not actually gain much at all. Its just a matter of timing.

    That said, no one should listen to someone else on where to invest.

  • Report this Comment On January 21, 2010, at 5:57 PM, hieuusa wrote:

    I admit that the writers spent significant time to write this report and that's their idea. We respect anyone ideas. However, I strongly disagree with "down" on BAC. They're on the way on recovery and don't let the noise around bother you as the stock up and down daily, look at he long term.

    Fundamentally, BAC is doing well on their business.

    I bet this stick would double in the next 2 -3 years.

  • Report this Comment On January 21, 2010, at 7:28 PM, XMFSinchiruna wrote:

    hieuusa,

    With all due respect, fundamentally BAC has incalculable exposure to toxic, illiquid assets that would swamp the balance sheet and stop any notion of strength right in its tracks if ever forced to reveal their true state of impairment via mark-to-market.

    How investors can feel secure investing in financial corporations while these exposures remain unmeasured and unmitigated is a complete mystery to me. It takes a different sort of mindset, I suppose... it just doesn't fall within my parameters of a sound investment by any stretch of the imagination.

    As for pondee's comment above, I refer him/her back to the link provided above to the article from February 2008, in which I urged investors in all major mortgage lenders to "run, not walk, to the nearest exit".

    http://www.fool.com/investing/dividends-income/2008/02/26/ho...

    "For me, the light at the end of the tunnel was extinguished this weekend. For anyone who owns a major mortgage lender, this is your last call to run, not walk, to the nearest exit."

    BAC closed that date at $42.72. I hope readers will agree that's one call worth noting.

  • Report this Comment On January 22, 2010, at 11:06 AM, crazy4swayze wrote:

    Michael Stipe's loyalty to the Bank of America is the only thumbs up i need for BAC.

  • Report this Comment On January 22, 2010, at 12:21 PM, boldspoo wrote:

    I believe the whole point of 2010 is that its not 2009... sorry to state the obvious, but the author is trying to look at what the stock will do and not what it did. But good job on the copy/paste.

    To TMFSinchiruna's comment:

    <How investors can feel secure investing in financial corporations while these exposures remain unmeasured and unmitigated is a complete mystery to me>

    Given the fact that the American economy practically failed says that people/institutions have no problem investing heavily in these financial corporations in 'good' times even with large exposure to risk. Its just that no one cared before, but given what I like to refer to as 'investment memory' - I'd see people forgetting about bank's risk exposure real fast in a couple quarters, losses or no losses.

    AP

  • Report this Comment On January 25, 2010, at 8:54 AM, XMFSinchiruna wrote:

    The discussion continues on my CAPS blog:

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=330310&t=0...

    Fool on!

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