Buy BofA Shares in the $8s?

On August 25 2011 the investing world woke up to learn legendary whale Warren Buffet was investing $5 billion into battered and bloodied Bank of America (NYSE:BAC) when it was trading at $7.61, down from $27.34 on August 25, 2008.  Today it is trading around $8.18 and Buffet stands by his investment and some of Wall Street’s most noteworthy bank analysts are screaming that BAC is a BUY.

What do you think?  With a whale in their corner and a Thompson/First Call analyst poll showing 10 BUYS or Strong BUYS, 19 HOLDS, and only 1 SELL should you think about taking a shot with BAC?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

C = Catalyst for a Stock’s Movement

Believe it or not, there actually is a potential catalyst on BAC’s horizon – a dividend raise.  According to the Wall Street Journal, Bank of America passed its most recent Federal Reserve Stress test buy unlike competitor JP Morgan Chase (NYSE:JPM) did not ask to raise its dividend.  Right not BAC management is focused on getting its balance sheet under control and an announcement of a dividend raise in the “future should be seen as hard evidence of their growing comfort with their capital position.

A = A Level Management Runs the Company

“A” level management should recognize when they are in a hole and stop digging and start taking action to right the situation.  In the history of corporate acquisitions, the Countrywide deal may go down as one of the worst acquisitions of all time, with the cost of the Merrill Lynch deal not far behind.  In short, new CEO Brian Moynihan found himself in something more like a yawning cavern than a hole but he has taken some solid steps to stop the bleeding.  Under his leadership the company adopted the Project New BAC strategy which calls for shedding non-core assets to shore up the balance sheet and for concentrating their focus on the company’s most profitable operations.  They anticipate $8 Billion in annualized cost savings by the middle of 2015.  In recent days you may have read of their decision to shed less than fully profitable ATM machines.

In a recent interview with Bloomberg Television, Warren Buffet said “Bank of America CEO Brian Moynihan is making the right moves to address the bank’s problems.”

S = Support is Provided by Institutional and Investors & Company Insiders

BAC is about 54% institutionally owned with big names ranging from State Street (NYSE:STT) and Vanguard to BlackRock (NYSE:BLK) to Dodge and Cox and even Citigroup (NYSE:C) and JP Morgan Chase.  Insider ownership is 0.02%.  Although it can be difficult to track institutional holdings since they are reported quarterly, there does not appear to be any evidence of selling pressure from either institutional  or insider holders.

E = Earnings are Increasing Quarter over Quarter

There is no way Bank of America comes remotely close to meeting this metric.  However, the most recent quarterly results showed a profit of $2.46 billion; an impressive turnaround from the year ago loss of $8.83 Billion in the same period.

E = Excellent Relative Performance versus Peers and Sector

BAC is clearly the red-headed step child amongst big US banks.  Even a supporter like Buffet prefers Wells Fargo (NYSE:WFC) and USB (NYSE:USB).  Bank of America’s abysmal timing with both the Countrywide and the Merrill Lynch acquisitions put them in arguably the deepest hole in a troubled sector.

T = Trends Support the Industry in which the Company Operates

High tech is coming to the banking world big time with enhancements like check depositing via smartphone pictures and the upcoming introduction of the mobile wallet payment applications where a smartphone will be all you need to access a bank account and move money.  This kind of technology is expensive and clearly favors the big banks who can afford it.  Right now you don’t see ads from local banks highlighting the capability of their ATM network to accept a check alone for deposit.

Conclusion

Whale watching is a favored strategy of some investors but you need to keep in mind that you and I are not whales.  The Buffets of the world get deals that for us exist only in our dreams.  He bought preferred shares and warrants in that deal at a premium since BAC CEO Brian Moynihan knew the buzz about the deal would be a boost in investor confidence in BAC.  An article in Bloomberg back then pointed out Buffet realized a 25% first-day return on the first day after the investment, which on an annualized basis showed the possibility of a 9,000% return.

The compelling argument for BAC right now is that it is trading below book value.  As of the most recent quarter, their book value per share was around $20 and the stock trades for around $7 and change.

Moynihan and his management team may be on the right track but the Countrywide cleanup represents a huge risk of derailing Project New BAC.  It could be years before the smoke of lawsuits is settled.  The other big shoe that could drop is SEC investigations of Merrill Lynch.

As if these were not enough reasons for conservative investors to STAY AWAY from BAC, how about their exposure to the European debt crisis?  They know they have a potential problem and have cut their overall exposure from the year ago $16.7 Billion almost in half to $9.6 Billion.  That still sounds like a lot of cash, so unless you have the stomach to BUY or WAIT and SEE, these three reasons alone make a strong case to simply STAY AWAY.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.