This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Time to believe in (Bank of) America?
Think the financial crisis is over? Have you been looking for your excuse to reenter the market, and maybe pick up a few shares of Bank of America (NYSE: BAC  ) ? If so, today's your lucky day -- because ace analyst Stifel Nicolaus just gave you not one, not two, but three separate reasons to buy B of A.

Reason No. 1: Earnings growth
According to Stifel, the primary reason to buy Bank of America today is that its earnings "trajectory" looks better than those of its peers over the next couple years. StreetInsider.com, which covered the upgrade, says Stifel has B of A pegged for 30% annualized earnings growth in 2014, versus only 5% "for the rest of the large cap bank universe."

This prediction is something of a departure from the usual view on Wall Street, at least regarding longer-term growth trends. Whereas most analysts see B of A posting 7.8% earnings growth through 2017, that's right in line with the 7.8% growth estimate at Wells Fargo (NYSE: WFC  ) , not significantly greater than the 6.9% rate posited for JPMorgan Chase (NYSE: JPM  ) , and quite a bit slower than the 9.2% estimate for US Bancorp (NYSE: USB  ) and the 12% growth rate assigned to Citigroup (NYSE: C  ) .

What's got Stifel so optimistic about B of A busting the curve, though, and outgrowing even the fastest of its peers? Mainly it's a problem with those peers: "We believe that without the declining expense base lever that BAC possesses, many banks are likely to post stagnant/modest EPS growth over the next two years as net interest margin pressures continue and loan loss provisioning inflects," says Stifel. Whereas the analyst thinks many of B of A's rivals have "bled the loan loss reserves dry, have little exposure to mortgage origination and debt underwriting in the low interest rate environment, and have no material expense reductions on the horizon," Stifel sees B of A as able to use all of these trends to reduce its costs and grow its revenues.

Reason No. 2: A better balance sheet
Stifel also likes what it sees in B of A's balance sheet, where "Basel III Tier 1 common capital ratio [is estimated at] 9% in Q4," and "the company has rebuilt its capital ratios much faster than expected."

And these aren't just pretty numbers. To the contrary -- they lead directly to...

Reason No. 3: Bigger dividends
As you may have heard, the Federal Reserve is getting ready to launch its latest round of stress testing on America's banks. On the results of this test hinge bankers' ability to issue and raise their dividend payouts.

And so it is that Bank of America's improved capital ratio -- by boosting its chances of passing next year's test -- may directly benefit shareholders in two ways: First, by directly increasing the monetary reward for those who already own the stock. Second, by making B of A look more attractive to other dividend-seeking investors, potentially increasing buying activity and boosting the stock's actual share price.

Foolish final thought
Does all this sound like a good "buy thesis" for Bank of America? Investors seem to think so, as they bid up B of A shares 4% today on the news. But before you follow their lead, here are a couple other factoids to keep in mind.

Over the past six years that we've been following its picks, Sitfel has outperformed nearly 95% of investors worldwide and gotten the majority of its recommendations right. It's been a slim majority, though. In fact, Stifel gets its guesses right only about 52% of the time. More disturbing still are the sectors in which Stifel's goofs tend to crop up:

  • 43.5% accuracy in "Commercial Banks"
  • 28.6% accuracy in "Diversified Financial Services" (the sector to which Bank of American belongs)
  • Only 50% accuracy -- literally hit or miss -- in "Consumer Finance" (i.e., credit cards)

While it's true that Stifel has done better with some "banking" stocks, specifically in the thrifts and mortgage finance arena (61% accuracy), on balance, I find enough mistakes in Stifel's past to suggest investors take today's bullish prognosis on Bank of America with a few grains of salt. If Stifel is right and B of A outgrows its rivals over the next couple of years -- well and good. If it doesn't, though, and if Stifel's peer analysts turn out to be right about the bank's long-term growth rate, then I have to say that B of A at 25 times earnings, and sub-8% growth, still doesn't look like a great bet to me.

Caveat emptor, investor.


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