A stock so bad it can only get better
This much-hated bank is a stinker for sure. But with so much holding it down, it's bound to come back up eventually.
There's nothing like a hated story. As I signed books last night at the 92nd Street Y in Manhattan before perhaps one of the most knowledgeable audiences you are ever going to get, I again met with great resistance to my idea of buying Bank of America (BAC).
Understand that there's no derision to the push. No one says, "You have no idea what you are doing." That kind of critique typically has to do with my insistence that I can't find a metric to justify getting behind Twitter (TWTR).
People want me to foment one. That's what you do when you are desperate to get behind momentum, and I have enough problems staying behind Amazon (AMZN) and Netflix (NFLX) -- particularly the latter after this week's Net neutrality court ruling. That apparently could cause Netflix to raise prices, but for all the wrong reasons. The stock has been a terrific play on Net neutrality, as it is often reported to consume one-third of peak Internet use.
No, it is Bank of America that people don't trust. Here's the skinny on the pushback.
First, the company is run by someone who doesn't know how to run a bank. I think the Bank of America that Brian Moynihan inherited was entirely dysfunctional, put together on the fly, with the worst possible acquisition of the era: the $4 billion stock purchase of Countrywide.
That target, which financed 20% of the 2006 mortgages, was worthless. We don't have the exact tally, but it is entirely possible that almost all of those mortgages defaulted, as that was the worst vintage possible. I don't know a soul who could have managed that poison pill properly, and it took forever to work through the system.
Two, the liabilities haven't gone away. Judging by the $2 billion litigation expense in the fourth quarter, this could be the beginning of a second round of mortgage putbacks and struggles with the authorities. It is true that there are more issues to settle. There could be more liabilities as well, based on some recent settlements with JPMorgan Chase (JPM) that could indicate B of A still owing as much as $8 billion -- the sums are all over the place. But B of A made $3 billion after the litigation charge, and it could handle $8 billion incredibly easily.
Three, there is still no dividend to speak of, and B of A seems reluctant to put a larger one through. All I can say is the size of the dividend is not up to Bank of America. Lots of people think the regulators have gone away, but that's not so for banks that were in as much trouble as Bank of America was. The last time B of A was in this good a shape was in 2006, when it paid a dividend north of $2 a share. At this run rate, that's certainly a possibility once again. The stock would have a gigantic yield if it could pay that again, and I think it will eventually.
Four, the company would be worth more if it broke itself up, and that idea did have some gravitas until this quarter. I think we saw tremendous synergies this quarter between Merrill Lynch and Bank of America, and Merrill had the best investment banking numbers this quarter. That's right, No. 1.
Finally, fifth. Without a doubt there's a belief that, without a mortgage pickup, this one's got no earnings momentum. The mortgage business is a commodity, one of the worst parts of any bank's business right now. What really matters is the net interest margin, which is truly a function of deposits and yield curve. These banks will simply coin money as rates go higher, and this is already starting to grow the net interest margin after a period of much contraction. The deposit growth was almost in the double digits here. The leverage will be immense. You want fewer mortgages and more deposits, and that's what Bank of America is giving you.
On my way to the Y last night, a man walking a dog said to me, "Bank of America -- I mean, really?" I said, "Oh, yeah, still very cheap." The man then made an allusion to how much money he could make with "tips" like this one. Scornful. Another person in line at the Y asked, "Do you know how much money I have lost on Bank of America?" All I could say was: "I don't care where a stock came from. I just care where it is going."
Considering that this one has gone back only to where it had been in 2011, and considering that it's down from its 2006 peak of $55, I think it has the most upside potential of any bank in my universe. Sorry, I wish I could be more negative. But I just don't have a case for it.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long BAC and JPM.
Jim Cramer's Action Alerts Plus: Check out this charitable trust portfolio and uncover the stocks Cramer thinks could be winners.
More from TheStreet:
"Do you know how much money I have lost on Bank of America?" All I could say was: "I don't care where a stock came from. I just care where it is going."
You're lucky this guy didn't clock you.
Oh that's right, you've been there , done that
Remember "Big Spender"/ "Jill" your internet fiance ?
This stock is down so much it has nowhere to go but up!*
*The same mind set that has lured many an unsuspecting investor to their doom on the quagmire of the Pink Sheets...
I bought in at 11 a share. Its now over 17. Im a happy puppy. Will hold until over $35 a share. Upside? Yes!
NOT to deceive and pump up Papa Doc ?
No agenda either ?
Jim's analysis of the Countrywide purchase is good.
I wonder how many paper clips Bank of America has?
Dicks', Best Boy & Homo Depot ....abs favorite threesome .... arf arf...
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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