Rising Star Buy: Bank of America

This article is part of our Rising Star Portfolios series.

Back in November, I bought shares of both Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) in the real-money portfolio I manage for The Motley Fool.

Here's what I said back then:

"Despite the who-the-hell-knows-what's-going-on-inside-them factor and the foreclosure doomsday scenarios, Bank of America and JPMorgan's low valuations, their hefty coverage of bad loans, and the likelihood of stealthy government protection has me willing to roll the dice on both these banks."

Afterward I published my buy thesis, we saw shares run up 30% or so for each stock.

Great! But now they're both back down around where I bought them, with Bank of America down about 8% and JPMorgan up about 8%.

All things equal, I usually don't like to add more money into a position unless it's gone down 20%. But I'm making an exception today with Bank of America, because I was quite happy to get the original buy-in price, and not too much has changed.

There is definitely a lot of danger out there for banking in general and Bank of America in specific. Unlike its similarly beaten-down cohort Citigroup (NYSE: C  ) , Bank of America still has a P/E ratio that isn't meaningful -- i.e., it's still losing money. And bad news about weakness in housing, talk of races to the bottom, allegations of shameful behavior, the robo-signing nightmare, etc., fill up my newsfeed.

But once again, I think the negative hype is overwrought at these prices. I'll take my shot now when Bank of America is selling for half of its book value. I will be picking up additional shares in my real-money portfolio Monday. And I'll continue looking in the banking space as others shun the industry. I'm seeing some good values in both large and small banks. We just have to be careful and pick our spots.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).

Anand Chokkavelu owns shares of Bank of America, Citigroup, and JPMorgan. The Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of Bank of America and has also shorted the stock in a separate account. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (15)

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 10, 2011, at 6:01 PM, oneman2dogs wrote:

    Bank of America cannot get out of it's own way. Nothing works right and no one seems able to fix it. Management continues to make the same mistakes over and over. Management is by committee. No one a the top ever gets input from the field other than surveys. Even then the results are ignored and only used for window dressing. Even at current price levels I would be short.

  • Report this Comment On June 10, 2011, at 11:44 PM, jimmy4040 wrote:

    BAC, which I own out of sheer foolhardiness, is a zombie bank. The flattening yield curve leaves it without any way to make money in the foreseeable future. Legal judgments will continue to pop up in unknowable amounts for the forseeable future.

    BAC is dead money until there is a significant rise in the yield curve, or in the housing market. In fact you might lose an additional 10-15%, even from here.

  • Report this Comment On June 11, 2011, at 9:22 AM, uhwilms wrote:

    Looking at a return in 3-5 years I don't think that you can go wrong with BAC at current valuations.

  • Report this Comment On June 11, 2011, at 2:32 PM, jcder wrote:

    None of you mention one of the biggest, if not the biggest source of concern for all of these banks: regulatory uncertainty. One of the Fed governors recently suggested that the "too-big-to-fail" banks should hold Tier 1 capital of 14%.

    All of these banks would have to issue billions of dollars of stock if they were required to meet this threshold.

  • Report this Comment On June 11, 2011, at 5:58 PM, jimmy4040 wrote:

    jcder:

    I believe Basel 3 has not been finalzied yet either, though I may have missed it.

  • Report this Comment On June 11, 2011, at 6:42 PM, erixbid1 wrote:

    My scorecard has not been great, but I am a new Fool. I have trepidations when I read about BAC. I can't reconcile what I read w/ what I experience. I own BAC because I bank there. I bank there because they have given me, & other members of my circle of family/friends good service on checking, savings, mortgages, & special offers even though we don't have lg accts w/ them. I switched banks when I got tired of probs w/ another lg bank I had since the 80s.

    BAC’s "Add it up" program gave me $80.00 cash back in 6mo of 2011; plus discounts on purchases & shipping online w/ their debit card. I would have bought the stuff anyway, but I saved a lot. Their "Round It Up" savings deposited over $500 to savings for 2011. $$ I did not miss & would never have saved otherwise. They do this for me in spite of my disability-bankruptcy in 2008 - which included their VISA CC.

    Maybe it isn’t smart business to treat a bad debtor this way & that is why what I read is negative. But it doesn’t make me change banks or keep me from referring people to them for business. It is good to see a “buy” article. Thanks!

    My $0.02

  • Report this Comment On June 12, 2011, at 12:00 AM, taguba wrote:

    Why buy a zombie bank buried under layers of uncertainly with god-knows-what as innards when you can buy a company such as Intel or GE that actually make and sell more than mirages?

    And if you don't like those, invest in a lemonade stand before buying into that mess...

  • Report this Comment On June 12, 2011, at 12:05 AM, nshamapant wrote:

    I see why people think it can't go lower, but this seems contradictory to a positive investment philosophy. You shouldn't be investing because it won't go lower, you should be investing because you believe it will go higher(to achieve your investment return goals). I see no INCENTIVE, just a cheap stock that may be a value trap.

  • Report this Comment On June 12, 2011, at 12:26 AM, mm5525 wrote:

    I kept thinking BAC looked cheap at 17, looked cheap at 14, and looks cheap here at 10 and change. Why do I have the feeling it will look cheap at 8? The CFC acquisition was like acquiring Hepatitis C. BAC is being squeezed by both ends, the regulatory side as well as the consumer. I realize the old adages of be "greedy when others are fearful" and to "buy depressed stocks from depressed people" but BAC seems to be a recipie for serious depression for anyone long in my opinion. If I were forced to buy anything in the banking sector, I'd go with JPM all the way. Their acquisitions were great in the case of Bear and WaMu, great leadership in Dimon, and a stellar balance sheet. If any bank makes it through this chaos, it will be JPM. If there were any sector to stick to the best in breed investment thesis, the financials are it. Best of luck!

  • Report this Comment On June 12, 2011, at 12:32 AM, TMFDiogenes wrote:

    Quote of the day: "The CFC acquisition was like acquiring Hepatitis C."

  • Report this Comment On June 12, 2011, at 2:17 PM, xetn wrote:

    Here is an interesting take on the banking sector (not just BAC):

    http://blog.mises.org/17260/still-trouble-in-bankland/

  • Report this Comment On June 12, 2011, at 8:10 PM, mountain8 wrote:

    Heck, I'm accumulating a little BAC just to have the satisfaction of voting against EVERY board member. Sure, I don't make a dent, but I feel better.

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