Saturday, February 7, 2009

Investors Guide:Bank of America: Good Investment or Bad Investment?

Stock of the Day

Financial stocks dominated headlines this week as Congress debated the economic stimulus plan. The nation's largest bank, the Bank of America, was of particular interest due to recent events. On Thursday, its share price briefly declined to a low point unseen since 1984 due to concerns that the federal government may nationalize the bank in order to stabilize its losses. Recently, Fitch Ratings also cut the financial institution's preferred stock rating down three levels to "BB" or "junk." However, it still managed to close in positive territory by the end of Thursday's trading day, and analysts still recommend against selling. Given all of the hubbub on Capitol Hill and the recent events that are taking place, should investors take the analysts' advice and go long or hold?

Daily Chart
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Stock Analysis
The answer is probably yes for a variety of reasons. Kenneth Lewis, the current CEO of Bank of America, just purchased 200,000 shares of stock on Wednesday totaling $958,340. This is in addition to the 200,000 shares that he purchased not more than two weeks ago for $1.2 million. Other executives in the company purchased a combined 150,000 shares this week. This helped the stock finish in positive territory on Wednesday and contributed to Thursday's close price of $4.84. Further increases on Friday came from a government report that indicates the US is experiencing its highest unemployment level since 1992. This lifted the markets in general because investors think it will sway Congress's decision in favor of the economic stimulus plan, which will benefit financials tremendously.

Buy Bank of America for just $4

The bank received $20 billion in federal aid on January 1. This is in addition to $25 billion of previous cash infusions from the government. Still, the bank posted its first quarterly loss in 17 years due to its recent acquisition of Merrill Lynch. It also halved its dividend payments at the end of 2008. Other shareholder concerns come from the fact that the government already controls much of the company's lending and recently put a salary cap on executive pay. Analysts and investors are comparing this trend to that of Fannie Mae and Freddie Mac before they were nationalized and fear that the largest US bank will follow suit. If it does, investors will see their shares wiped out.

Richard Bove, a banking expert and analyst at Ladenburg Thalmann & Co (LTS: Charts, News, Offers), stated that nationalizing the bank was absurd given its potential to survive. He also praised the financial institution for its positive cash flow and strong government backing. Because this is the case, it is in a strong position to rebound in the future. The low price it is facing right now is due to the company's circumstances; too much money was doled out for Merrill's assets and too many toxic assets are poisoning the balance sheet. Regardless, the company's feat secured a great potential source of future growth.

However, the executives may not have agreed earlier in January. The Wall Street Journal reported Mr. Lewis flew to Washington D.C. to talk to federal regulators about backing out of the Merrill Lynch deal. He cited that there were too many problems. A couple of days later, Federal Reserve Chairman Ben Bernanke stated on a conference call that the Bank of America had "no justification" for withdrawing from the acquisition and agreed to provide protection against losses up to $118 billion. There was also the concern of how this would reflect on the bank if they needed more government support in the future. In the end, it was decided that they would not withdraw and when an analyst asked him about the deal, he was quoted saying, "We did think we were doing the right thing for the country."

So the depressed stock price is just a sign that they are far from finished with merging Merrill into their business. This is not to say that the Bank of America has a yellow brick road to travel because it continues to encounter more problems. For example, it still needs to find the right people to run its Merrill assets since Greg Fleming and James Gorman departed. Still, with so many analysts suggesting investors should buy the financial giant's stock, it is difficult to believe that so many can be wrong; and while they may have been wrong before in the past, they are probably onto something with their evalution of the Bank of America.

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