The migration continues.
Tom Brown, the founder of hedge fund Second Curve Capital, added his name to a growing list of former Bank of America (NYSE:BAC) bears to turn bullish on the still recovering bank.
B of A's stock "will reach the low $20s over the next 18-24 months," wrote Brown in an article posted yesterday on Seeking Alpha. In case you hadn't done the math already, that's a double over today's price.
Should you care about Tom Brown?
At first glance, Brown's conversion shouldn't be that big of a surprise.
Speaking on CNBC in the middle of last December, former B of A bear Meredith Whitney -- who was, reported the Wall Street Journal, wearing a "very similar jacket to the one host Maria Bartiromo was wearing" -- observed that she had "not seen an opportunity like this in four or five years."
With B of A's "junk out of the trunk," Whitney believes that the bank will be able to quadruple its dividend this upcoming March when the Federal Reserve announces the results of this year's stress tests. "There's an incredible growth opportunity within the financials," said Whitney, "particularly Bank of America."
But even considering Whitney's change in tune, Brown's conversion is nevertheless an entirely different animal. As he observed:
Given my rocky history with the company, you may be surprised to learn that one of our investment funds' biggest winners last year was -- are you ready? -- Bank of America. Yes, that Bank of America: the company whose non-stop deal-making in the 1980s and 1990s helped me make a name for myself as an analyst, simply by pointing out that then-CEO/raving egomaniac Hugh McColl was diluting his shareholders half to death with all the new shares he was having to issue to pay for his empire.
That's right. Brown has spent the better part of three decades bashing on the lending giant. It's comparable to a Yankees' fan switching allegiance to the Boston Red Sox. Not likely, in other words.
Taking a cue from the comments above, here's what Brown had to say upon former CEO Ken Lewis's resignation at the end of 2009:
Ken Lewis was simply an egomaniac. As CEO of Bank of America, he cared more about size, power, and personal compensation that he did about creating value for shareholders. The single most important lesson that Lewis learned from Hugh McColl -- and he learned it well! -- is that, the bigger the institution, the more the CEO gets paid. So for Ken Lewis, size was all that mattered.
Now, in all fairness, Brown also gave a rare thumbs up to the absolutely, unequivocally worst deal in B of A's history -- and perhaps any other company's history for that matter -- the 2008 acquisition of Countrywide Financial. According to Brown at the time:
There's still a awful lot of meat on the bones at Countrywide, and Ken is getting it at a great price. It's been at least a decade since I liked any of B of A's deals. But this one may make sense.
Or, as it turns out, it may not. The mortgage-originator-cum-criminal-enterprise has since cost B of A more than $40 billion in legal settlements alone; and when all is said and done, my conservative guess is that Countrywide will cost B of A far in excess of $100 billion.
As the bank's current CEO Brian Moynihan has expressed: "There aren't many days when I get up and think positively about [that deal]." I'll bet that's true.
To get to the point, then, Brown's endorsement is significant for three reasons. First, on a subjective level, it says something about the changing sentiment on Wall Street toward the company.
Second, he makes a good argument in support of his case. Among other things, he points to B of A's leading capital levels, improving credit quality, shrinking expenses, and undervalued share price -- all of which are also discussed here. As he noted: "[O]ur investment thesis [...] is simple: all the company needs to do is get back to its former levels of mediocrity, and shareholders will be amply rewarded."
And finally, it matters to me because it's the same drum that I've been beating over the past few months -- yes, I'm vain and like when people confirm my opinion. In October of last year, I predicted that B of A had "turned the corner." And the following month, I argued that it was "time buy B of A." Shares have since climbed more than 20%.