Bank Of America Investment Opportunity
Sunday, November 29, 2009 at 11:37AM 
Overview: Bank Of America(BAC) is the largest bank in the United States. It has banking relationships with approximately 53 million consumers and small businesses.
The bank has more than 6,100 retail banking offices, nearly 18,500 ATMs and provides online banking support for 29 million active users. Bank of America offices can be found in 150 foreign countries.
Reasons to buy common shares:
1. The Fed has stated that interest rates will not rise in the immediate future and the current steep yield curve is very positive for the profitability of large banks.
2. Government will not let large banks fail. Bank Of America is here to stay.
3. Bank currently trades under $16 dollars a share. BAC trades at a huge discount to normalized earnings. 3 billion in revenue in 2009 may reach 40 billion by 2012 with the proper integration of Merrill Lynch and Countrywide financial.
4. Bank has a substancial stake in several financial firms including Blackrock and China Construction Bank. Combined with the current cash on its balance sheet, it amounts to more than $70 for each share of stock.
Risks:
1. Government interference through its 45 billion TARP stake continues. The government Pay Czar is dictating employee salary and as a result finding a new CEO to replace retiring Ken Lewis is proving to be challenging for the Board of Directors.
2. Further short term dilution to repay TARP through a secondary stock offering is certainly possible.
3. The company will recover with the housing market and the U.S. economy but a double dip recession in 2010 is still possible.
5. Higher unemployment may mean higher credit card delinquencies and higher losses to the bank than planned.
Conclusion: All the equity risks are short to intermediate in time. The long term case for price appreciation for BAC is compelling. Bank of America will probably have resolved all loan problems by 2012 and the stock price will be much higher by then. Short term, a new CEO and the repayment of TARP to get the government out of the bank should act as a catalyst for the price of the stock. Large Hedge Funds ( Paulson ) are buying and we think the small investor should to. A stock price of 25- 30 is possible within 12 to 24 months with a reinstatement of a substantial quarterly stock dividend by then.
The eWorldvu model retirement portfolio and growth portfolio will each buy 500 shares at the stock market open on Monday November 29, 2009. Our strategy will be to buy more shares on significant price dips and consider selling covered calls on a price rise to 20. (Disclosure: Members of eWorldvu are currently long Bank of America stock). As always you should do your own due diligence before you decide to invest.
Jim Smith
Purchase made at open 500 share at $15.59 - $7795 in Retirement and 500 shares at 15.59 - $7795 in growth portfolio. S and P at 1089
Reader Comments