1 Stock to Buy in April

When you're in the exam room, you never want passing doctors to stop and blurt out, "Ooh, I gotta see this!"

Unfortunately, if doctors were stock analysts, the banking sector would have been the subject of a lot of medical rubbernecking over the past few years.

But this patient isn't terminal.

For good or ill, banking is the circulatory system of capitalism. From individuals using credit cards and financing houses to entrepreneurs getting start-up capital to municipalities funding infrastructure projects to Fortune 500 companies ensuring liquidity and easing international expansion, banks are everywhere.

The largest banks aren't just too big to fail. They're too essential to fail.

That's a major reason I think the beaten-down banking sector as a whole will outpace the Dow (INDEX: ^DJI  ) and S&P 500 over the next few years. Quite simply, we will continue to need their services and there isn't really a meaningful alternative. In fact, I see the distinct possibility of a double (or even a triple) for at least one big banking stock.

From the ashes...
If the banking sector as a whole has been treated like a leper colony, no big bank has been more maligned than Bank of America (NYSE: BAC  ) . Part of that is deserved. There are reasons Bank of America is being priced by the market as the worst big bank in America. The biggest reason? The botched Frankenstein-ing it did during the financial crisis, adding both Countrywide and Merrill Lynch.

As the largest mortgage lender in the nation, Countrywide brought with it around $200 billion worth of especially toxic assets as well as a bevy of mortgage-related litigation that is still rocking B of A's financials more than four years after the purchase. 

In the fall of 2009, at a time when more savvy players like Wells Fargo (NYSE: WFC  ) (with Wachovia), JPMorgan Chase (NYSE: JPM  ) (with Washington Mutual), and Barclays (with Lehman Brothers) masterfully picked over carcasses, Bank of America wildly overpaid for Merrill Lynch. The $50 billion stock deal (at the time of the announcement) was a 70% premium to where Merrill shares were trading and represents about half of Bank of America's current market value.

...there could be a phoenix
There is a lot not to like about Bank of America, but part of its bad rep has been unfair. As the perceived weakest of the herd, B of A makes an easy target for Occupy Wall Streeters, folks angry about foreclosures or $5 debit card fee plans, and the salacious press. Because of the outsized focus on Bank of America leading to a beaten-down share price, I believe there's that much more upside if things go better for the housing market and economy in general and Bank of America's operations in particular.

I did a good job railing against Bank of America's terrible financial crisis acquisitions, but we can't blame current management for past management's mistakes. Similar to Vikram Pandit at Citigroup (NYSE: C  ) , Bank of America CEO Brian Moynihan has been working to get smaller by jettisoning non-core assets. This also has the effect of shoring up capital. Moynihan's also working to meaningfully lower costs via Project New BAC, which will be ongoing till the end of 2014. Once we differentiate between the actions of Moynihan and the actions of his predecessor (Ken Lewis), I like what I'm seeing.

A double from here?
Many will look at Bank of America's stock price, which has nearly doubled from its lows in December, and say optimism is already priced in. I don't think that's true. It's been up on good economic news and on passing its recent stress test, but it's not hard to envision a double (or even a triple) from here.

This is how I'm thinking about it. A double would put B of A at a market capitalization of about $200 billion. Assuming the market isn't ready to pay up for a bank of B of A's ilk, that would mean $20 billion in earnings to justify a P/E ratio of 10.

B of A has fought to eke out a small profit over the past 12 months, but it's been dragged down by roughly $20 billion in losses from its mortgage operations. Think of this largely as the "sins-of-its-past" bucket, chock-full of foreclosure, litigation, and impairment expenses. Once Bank of America can get this area back to treading water, you've justified a double. And if you're looking for a catalyst beyond earnings, eventually raising dividends past its current penny a share per quarter is your huckleberry.

Taking a different angle, if Bank of America can get back to producing a slightly less than mediocre return on equity of 9%, it'll produce that $20 billion to justify a double. How reasonable is that? It beat 9% every year from 1992 to 2007.

And if we raise that P/E ratio from 10 to 15, that double becomes a triple.

Triple or nothing?
Bank of America has gotten a lot of headlines as it's flirted with $10 a share, but as I've explained, I don't think $20 or even $30 a share is out of the question as it turns around.

Just don't confuse Bank of America for a sure thing. Real risks remain in this turnaround. For a bank that's generating twice Bank of America's profits despite being more than 100 times smaller(!), check out the free report I wrote: "The Stocks Only the Smartest Investors Are Buying." Just click here to access it.

Anand Chokkavelu owns shares of Citigroup, Bank of America, JPMorgan Chase, and Wells Fargo. He owns warrants in Citigroup, JPMorgan, and Wells Fargo and long-dated options in Bank of America. The Motley Fool owns shares of Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo. The Fool owns shares of and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (44) | Recommend This Article (171)

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 April 05, 2012, at 6:35 PM, Silkscreen wrote:

    What about Regions (RF)? They just paid back their TARP money.

  • Report this Comment On April 05, 2012, at 7:57 PM, GENEROSIDAD wrote:

    \What do you tink about SPDR GOLD TRUST., or ETF GLDI the USA dollar devaluates " crisis like in Argentin years past", do you think this isntrument can shelter your money?

  • Report this Comment On April 05, 2012, at 8:26 PM, hanover67 wrote:

    I think you're right about BofA. I remember when they got in trouble during the early 1980's with bad loans. Their credit process was a mess. They had to sell their Tokyo head's residence to show earnings. But, every third family in California had their checking and savings account at BofA and had no intention of leaving, they opened for business every day, the tellers gave pretty good service, and they finally fessed up to their problems, took a huge provision for loan losses, and moved on.

    Obviously they have made some serious mistakes, but as you point out, they have a new sheriff and they are trying to solve their problems. The one caveat it that a lot depends on the housing market and that is going to take a lot longer than most people think to get back to anywhere near normal, and BofA has more housing-related problems than anyone else. After all, it is the world's largest S&L.

    So, while the stock price may rise, the earnings that you cite may take a long time to materialize to cause it. Maybe you could do a lot better somewhere else?

  • Report this Comment On April 05, 2012, at 9:58 PM, vskatusa wrote:

    Why would I want to invest in a beaten asset class when there are other alternatives...I would rather stay away from banks for next 5 years

  • Report this Comment On April 05, 2012, at 10:46 PM, hiddenflem wrote:

    cannot buy a company with THE WORST customer service of any company I have ever experienced. Why does anyone bank with them? I don't get it.

  • Report this Comment On April 05, 2012, at 11:22 PM, newageinvestor wrote:

    Agree with hiddenflem. Who in the world would buy them? There are soooo many other stocks where we can make money. Why in the world focus on this bummer?

  • Report this Comment On April 05, 2012, at 11:51 PM, WilliamK82 wrote:

    I closed my account there and went to a credit union. But I bought a few shares back in Jan '12, when I already missed a 50% return since it bottomed out at $4..9/share. Now it's just under $10. And though this may be more of a speculative play, I think the article is right, this bank is too big and too essential to fail. I doubt it will triple, but it has already doubled. It may again.

  • Report this Comment On April 06, 2012, at 1:55 AM, raycamet wrote:

    To buy WFC I would have to sell my BAC and take a 700% loss and I would only have around 400 sh of WFC. I think I will stay where I am when it comes to banks The only good bank shares I have owned was DB I made around 500 % on that while BAC went down the drain. Ray

  • Report this Comment On April 06, 2012, at 2:22 AM, raycamet wrote:

    I just read your article on buying warrants on WFC, do you have to wait till 2018 to buy the stock for $34.01 because if you do I doubt I will be around then? Ray

  • Report this Comment On April 06, 2012, at 6:26 AM, The1MAGE wrote:

    I got in at $7.50, then added to my position 3 more times as the stock dropped.

    Right now they are recovering from a bad economy, bad government regulations, and bad management decisions. But if they haven't died by now, they aren't going to.

    They have made plenty of moves, and since Buffet got on board, I am convinced there is no way he would buy into a company that is going to go bankrupt.

    I am not waiting for a turn around, because they already are turning around. I am also not waiting for some miracle here. I am only waiting until they simply get back to normal business. At that point, they are worth at least $30 a share.

    But I am planning on lightening my load at about $15, also at $30, and at some number in between that I haven't decided on yet.

    Whatever I leave in after $30, will stay there.

  • Report this Comment On April 06, 2012, at 9:00 AM, fishwealth wrote:

    I'm sitting on a huge loss in BAC. I refused to take it as the value halved from my $55 and + purchases into it at the turn of the century. Now the value of what is left is so pitiful there is no point cashing out. Appalled an angered at the Merrill Lynch purchase I felt the same way. I have accounts there and am sometimes one of those rudely treated customers. Most of the personnel I deal with are extremely good at handling people and problems, but there seems a loss of esprit d'corp that is sad to experience. Assaulted from all sides in 2008 and cornered by my own bad planning, I remain with BAC because I felt it was essentially a good organization. Nice to hear some positive appraisal not my own.

  • Report this Comment On April 06, 2012, at 1:03 PM, woodNfish wrote:

    fishwealth, you violated one of the main rules of investing which is cash preservation. You should have trailed stops to get you out of the market if the stock goes south.

    Trailing stops can be set with percentages. Figure out how much you'd be willing to lose and set your stop there; 8%, 10%, 12%? Decide on how much pain you are willing to accept for the risk of a profit and do it.

    Motley Fool will not tell you to do this because they are, well ... fools. And I don't mean that kindly. They have screwed a lot of people with their Netflix advice. Listen to them, but get other advice elsewhere.

  • Report this Comment On April 06, 2012, at 1:07 PM, woodNfish wrote:

    Thw1image, what did you get into?

  • Report this Comment On April 06, 2012, at 3:56 PM, ccolemaninc wrote:

    In 2009 when Ford had hit bottom and started back up I considered it at about $5 per share and wondered if I should get in. I mean, its Ford right?!?!? Well, I didn't get in...regretfully.

    I don't want to be looking at BoA at $15 per share in 2015, wishing I had got in back in 2012. So I got in earlier this year at just under $8. I hope my move with BoA here will prove that I learned my lesson when I didn't trust my gut with Ford three years ago.

  • Report this Comment On April 07, 2012, at 12:39 AM, MrMinnesnowtan wrote:

    Bank of America does provide terrible public service, and I think they are dishonest. I hate them, but am forced to bank with them for lack of a convenient competitor. There strength is location, location, location.But self-respect keeps me from supporting them as an investment. There are some things more important than a few extra bucks.

  • Report this Comment On April 08, 2012, at 10:00 AM, Tomtherailnut wrote:

    If it is still true that one should buy when blood runs in the streets, then BAC remains a good play. The financial sector is still down due to the melt-down of the past several years, and public confidence in BAC is still low. The way BAC is rebuilding its core businesses, the inevitable worldwide recovery, and the public's ability to ignore lousy service means a triple or even quadruple price from here is very possible. Regardless of how stupid some of the bank's moves have been the past several years, the current management is on track to reboot the earnings stream while keeping costs low. Buy.

  • Report this Comment On April 08, 2012, at 10:44 AM, steveat wrote:

    It's a huge setup..

    Look at it. Why would any company buy that much toxic waste. Do you think their lawyers, M&A specialists, executives are idiots?

    The gov basically needed to displace this (toxicity) somewhere else or there would be no money for anyone. The gov would rather bailout a can't fail than a big fail. The real reason was for future potential profit by killing the stock price and buying in low and payment in stock options to execs instead of paying bonus..thus appeasing Occupy morons and keeping the gov from having to hold all these toxic assets.

  • Report this Comment On April 08, 2012, at 3:51 PM, stopcrossselling wrote:

    ray, how can you lose 700%? Not sure its possible ,,,

  • Report this Comment On April 09, 2012, at 5:18 PM, zaab55 wrote:

    Motley Fool will not tell you to do this because they are, well ... fools. And I don't mean that kindly. They have screwed a lot of people with their Netflix advice. Listen to them, but get other advice elsewhere.

    I do beleive they have mentioned trailing stops in other articles. Also I did great with Netflix. Bought in 2005 when it was $8 dollars or so. I beleive MF was talking about it then. I sold too soon for only $120

  • Report this Comment On April 12, 2012, at 4:12 PM, nontechie wrote:

    Those liking BofA but wanting a little leverage should consider the TARP warrants, BAC/WTA, currently at $4.40. These give you the right to purchase shares at $13.30 any time between now and 1/16/2019. They also have a dividend adjustment clause that could lower the strike price if BofA starts paying a dividend before they expire.

  • Report this Comment On April 13, 2012, at 11:04 AM, rsanchez05 wrote:

    great article about the ugly side of BoA in Rolling Stone:

    http://www.rollingstone.com/politics/news/bank-of-america-to...

  • Report this Comment On April 13, 2012, at 11:16 AM, Patfoolish wrote:

    I hate BOA. If there is any question about the Mafia being alive and well in America, just look at the banking industry. BOA has assembled the greatest collection of theives and fools we've seen since Mario Puzo wrote the Godfather. The only way for that stock to improve is for management to realize that the people banking with them are customers, not marks. I don't see that happening anytime soon. I hope this is not in violation of the Fool's Rules.

  • Report this Comment On April 13, 2012, at 11:20 AM, Fonz56 wrote:

    I refuse to support companies and institutions that take blood money from the weak. Most banks are skum bags supported by CEO that have made millions and maybe billions off the common person including investors! Big Pharm are in the same category. Except pharmacy company's feed off the hope's and dreams of people seeking merciless hope for a price, meaning huge profits. I don't need either's blood on my hands. OH, yes, I don't like to be lied too!

  • Report this Comment On April 13, 2012, at 11:33 AM, OldRoadhog wrote:

    We were fortunate to be able to get loose from B of A and move our accounts to a far better local bank. B of A's service is non-existent, and they are impossible to deal with.

  • Report this Comment On April 13, 2012, at 11:48 AM, CrashCanuck wrote:

    This recommendation seems to go against the MF mantra of not buying stock based on the numbers. I am not a BofA customer, but just the acrimony in some of the comments leads me to believe BofA isn't taking care of it's customers.

    In fairness to BofA, the Merrill Lynch acquisition was a shot gun marriage engineered by Henry Paulson.

  • Report this Comment On April 13, 2012, at 11:57 AM, 100tradejack wrote:

    I agree. BAC will be doubling over the next year or so, but be prepared for some volatility.

    Jack

    100 TRADE JACK

  • Report this Comment On April 13, 2012, at 12:12 PM, MikeMark wrote:

    I think you already missed your double. From $4.5 in 2009 to $9 today.

    There are probably 2 to 4 more years of mortgage losses like the ones recently experienced. In addition to that, those losses will move more homes from the shadow inventory back onto the market. While the earnings may increase somewhat, the market cap may actually decline or remain steady, due to two factors: reduction of shadow inventory that is currently over-valued on the books and conversion of inventory that is over-valued into marked-to-market inventory due to loan sales. Those conversions will actually be a hit to total capitalization.

    Add to that the idea that the P/E ratio may decline and you can foresee a loss from here of 20% under really good market conditions. In fact, I'll predict that we see BAC priced near $7.50 long before we see it priced at $15.00.

    One caveat: if the FED cranks up monetary easing again this prediction may be wrong. However that doesn't change the fact that there are far better places to put your money than in the stock of a bank.

  • Report this Comment On April 13, 2012, at 12:12 PM, WineHouse wrote:

    reply to woodnfish: If I had a clear crystal ball, I would have known to NOT hold on to EastmanKodak (all the way down and adding as it fell), I would have known to NOT hold on to Coachman, and -- ta-dah! -- I would have known to YES INDEED hold on to the IBM that I bought at 120, stupidly sold at 66, and then -- as if Jethro Gibbs had knocked me upside the head or something -- bought it back at 63 and am holding it even now.

    Ah, yes, the crystal ball.

  • Report this Comment On April 13, 2012, at 12:15 PM, MikefromMars wrote:

    I Researched this one on my own and bought 2000 @ 5.96 in January! I bank with them and their biggest problem was buying country wide which I think that the government forced them too! Every company has problems but BOA will win! I've banked with them and I own 4 investment properties and my mortgage guy has an affinity for finding me the best rates! This relationship has been ongoing for 14 years. My experience has been good!

  • Report this Comment On April 13, 2012, at 1:16 PM, StocksDoc wrote:

    BAC does look good now.

    Besides it's good-looking long-term Technicals,

    it's Stock Seasonality for the spring isn't bad looking either:

    http://www.blashing.com/_free_/2/BAC.php

    .

  • Report this Comment On April 13, 2012, at 1:27 PM, finchrider wrote:

    I agree with Fonz56. It's the paradox of facts and values. Today's values become the facts of the future. Whatever we feed grows.

  • Report this Comment On April 13, 2012, at 2:03 PM, whyaduck1128 wrote:

    "but we can't blame current management for past management's mistakes."

    Yes we can, for two reasons--One, they have to clean up the mess, which costs big money, and Two, those now at the top were presumably a part of the "management" "team" that created the mess in the first place.

    BOA and you are expecting us to give a free pass to people who at the very least were a part of the corporate culture that created this CF of a company. Unlike the government, I cannot see a rationale for entrusting those who got us into a mess to get us out of it.

  • Report this Comment On April 13, 2012, at 2:14 PM, p3tar wrote:

    BoA does not care about their customers and leadership of the company has no social and moral standards. I would never ever do business with them hence I will never own their stock.

  • Report this Comment On April 13, 2012, at 2:56 PM, MikefromMars wrote:

    With all of the hate towards BOA on this thread, makes you wonder why no one is in jail! I guess it does make sense to be a political donor. None of these bankers are in jail. If they have performed illegally then they should go to the Pokey! I, for one, would like to know who is responsible. I just can't hate a whole company (other than poison gas makers)! I would rather have justified outrage at the real responsible ones!

  • Report this Comment On April 13, 2012, at 8:30 PM, mtnmdjd1 wrote:

    This comment goes to the micro side of B of A. As a rule micro events are poor predictors of max trends. But there is still a relationship but between micro behaviors and macro outcomes. I am a B of A cardholder for the last 13 years. I have never had an overdraft or a late payment. My original credit limit on this card was $75,000. It is now down to 37K and change. In general as I pay down my debt my credit limit shrinks even though my income is rising. When I ask about this they say "it is policy." I can add a dozen similar stories. I am indignant and have the resources to take my business elsewhere and am in the process of doing so. As a rule I do not invest in or do business with companies that are unethical. B of A is one of those unethical companies. There are enough investment opportunities in the world that we don't need to be sorting through this kind of skunk pee. Best of luck to all. Mark

  • Report this Comment On April 13, 2012, at 10:55 PM, CrazyCharlieYeah wrote:

    Toxic Management Bad Service Toxic assets in a real estate market that is oing to drop again. What's to love/ Not much

  • Report this Comment On April 14, 2012, at 10:59 AM, catinthesun wrote:

    I have watched too many friends lose homes and other assets due to unethical business practices by banks...particularly Bank of America. I cannot bring myself to invest in companies I don't believe in. Personally, it is important for me to invest in companies that I feel make a positive contribution to the world and that value other human beings.

  • Report this Comment On April 14, 2012, at 12:18 PM, darond wrote:

    I am most disappointed that Motley Fool has adopted some stocks based on criteria that is likely to be future oriented for our earth and generally accepted as more ethical..like smoking is bad for all humans and especially children given life time exposing them.

    I think you would attract additional folks if you included what is sometimes called socially responsible investiment. We have an account with TIAA CREF and have economically done very very well with this account so it can make economic sense as well as personal values choice.

    I salute your savey investment advice over the years and encourage you to consider another portfolio that has these additional criteria.

    Bank of American Has such a poor record on almost all areas of community responsibility.

    It is the antithesis of what will give our children and grandchildren an ethically and civic minded based future. We owned the stock due to their buy out of other stock we owned. Inertia took us too long to sell it (at a big loss I might add.) so we followed closely what it was doing to the fabric of our nations original values...very sadly...

    Thank you for reading this and I welcome reading your response as well as other readership response.

    in appreciation David

  • Report this Comment On April 14, 2012, at 1:44 PM, Kmnormand wrote:

    All sectors have their own sins - tobacco, pharma, oil, food - so rather than stay out of the market, I use it to my advantage. I've also had friends lose homes, but some of them could have avoided that fate if they didn't say they were unable to pay their mortgage, yet were able to eat out 5 days a week, or buy new cars, etc. BAC makes an interesting trade. They are at a tempting p/b level, and with volatility you can create a good yield with buy-write strategy. At current share price, you can grab 1200 shares for just over $10k. Write upside calls on half of them to create synthetic dividend. If it rockets higher, you can roll up and out, or get called away at ~15% gain while riding the upside with the other half of your position.

  • Report this Comment On April 15, 2012, at 10:11 AM, Animask wrote:

    Lee Iacocca...sounds familiar? Rescuing Chrysler from bankcrupcy and accepted an annual salary of 1$. Clearly, his plan to rescue Chrysler meant more than his own pocket. His determination and conviction as a leader meant more than going through the motion for a pay cheque. No leader is perfect, but Lee instilled a sense of passion and pride to workers and TRUST. Families never travelled the same on the road with the genius of Lee and his vision of popularizing the minivan as we know it.

    Can we have leaders that CARE, that would put their take home pay on the line and be motivated for the right reason? According to a book I read (The Living Company from Arie De Geus) the average life expectancy of a multinational corportion - Fortune 500 or its equivalent - is between 40 to 50 years (half the lifespan of a human), and a full one-third of the companies listed in the 1970 Fortune 500 had vanished by 1983 - acquired, merged or broken to pieces. Clearly, leadership needs to be more sustainable.

    Whether it is BoA or any other American companies, the survivors will depend on the hunger to survive, the real concern for contribution (results) and the vision of leaders and their willingness to share the risk and innovate.

    BoA will somehow get back on track, don't know much about its leaders, but things seem to be moving in the right direction.

  • Report this Comment On April 15, 2012, at 11:45 PM, nothinleft wrote:

    I've had nothing but bad experiences with BoA since in the 70's. They are absolutely not consumer oriented.

  • Report this Comment On April 17, 2012, at 12:34 AM, nytflyt wrote:

    Bank Of America can drop in the ocean for all I care. They tried to screw when they could and I will not invest a dime in them even if the payoff is twenty fold.

    I'm moving my accounts from Merrill Lynch just as soon as I'm able and my family and I have been their customer for over 40 years.

    I will not do any business with them. Ever.

  • Report this Comment On April 21, 2012, at 5:25 PM, emcmoney wrote:

    After yesterday I'm glad I didn't buy any shares.

  • Report this Comment On May 12, 2012, at 1:20 PM, closeups wrote:

    move your bank a/c to credit union.

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