{"id":36815,"date":"2013-03-13T01:53:23","date_gmt":"2013-03-13T05:53:23","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=36815"},"modified":"2013-03-13T02:23:46","modified_gmt":"2013-03-13T06:23:46","slug":"is-bank-of-america-bac-truly-a-must-own-stock-for-2013","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/03\/13\/is-bank-of-america-bac-truly-a-must-own-stock-for-2013\/","title":{"rendered":"Is Bank of America (BAC) Truly \u201cA Must Own Stock\u201d for 2013?"},"content":{"rendered":"

By WallStreetDaily.com<\/span><\/a><\/p>\n

Holy smokes, Batman. Meredith Whitney is at it again!<\/p>\n

You\u2019ll recall, she\u2019s the banking analyst who infamously predicted in an interview with \u201c60 Minutes\u201d that \u201chundreds of billions\u201d of dollars in municipal bond losses would occur in 2011.<\/p>\n

She was way off the mark, though. Only about $3 billion in losses was actually reported. So we gave her the honor of making The Worst Prediction of 2011<\/a>.<\/p>\n

Well, fast forward to today, and she\u2019s dusting off her crystal ball again \u2013 on Bloomberg Television, no less. This time around, she\u2019s predicting that \u201cBank of America<\/strong> (BAC<\/a>) is the stock to own this year.\u201d<\/p>\n

Is this just another attention-grabbing media stunt? Or a bona fide prediction that we should consider acting on? My answer might surprise you\u2026<\/p>\n

The Only Smart Way to Invest<\/strong><\/b><\/p>\n

First things first, I need to confess that my<\/em> crystal ball doesn\u2019t always work, either. So I can\u2019t be too tough on Whitney.<\/p>\n

Take, for instance, my call back in August 2011<\/a> that Bank of America was a screaming \u201cBuy\u201d on the heels of Warren Buffett\u2019s investment.<\/p>\n

By the end of the year, shares dropped almost another 30% in value.<\/p>\n

Of course, I did double down on my erroneous call, saying that Bank of America would \u201crally mightily in 2012.\u201d And it did. In fact, it ended up being the top-performing stock in the Dow Jones Industrial Average last year, rising 109.5%.<\/p>\n

I bring this up not to brag. Instead, I want to put Whitney\u2019s call into perspective.<\/p>\n

It\u2019s more about momentum than boldness. And based on the results of our own personal \u201cstress test\u201d on Bank of America, I\u2019ll concur with her that the momentum will most likely continue. But I don\u2019t <\/em>agree with her on how to profit from it. (More details on that in a moment.)<\/p>\n

First, let\u2019s cover the six reasons why I expect the bullish trend to continue for Bank of America in 2013\u2026<\/p>\n

~Reason #1: First in, First Out <\/strong><\/b><\/p>\n

The banks got us into the financial crisis. So it stands to reason that they need to lead us out, too. That recovery is undeniably underway. But given the severity of the downturn, we still have a long way to go.<\/p>\n

Just look at Bank of America\u2019s results. In the six years leading up to the recession, it averaged about $14.5 billion in net income. Over the last 12 months, though, the company\u2019s net income checked in at roughly $5.5 billion. By that metric alone, profits need to more than double before we\u2019re back to pre-recession averages. And since share prices ultimately follow earnings, it\u2019s not a stretch to expect that shares could double again, too.<\/p>\n

~Reason #2: Top of the Tier <\/strong><\/b><\/p>\n

Bank of America has engaged in an aggressive effort to shore up its finances by restructuring, cutting costs and selling off assets. In fact, the company remains on track to shed $8 billion in annual costs by mid-2015.<\/p>\n

The end result? Its Tier 1 Capital Ratio, which is the industry standard measurement of financial stability, currently ranks at the top of the list for the nation\u2019s largest banks, at 9.25%. So if we\u2019re betting on a banking recovery, it makes sense to bet on the bank that\u2019s the strongest financially, right?<\/p>\n

~Reason #3: A Building Recovery <\/strong><\/b><\/p>\n

We can all agree that the residential housing market is recovering. It\u2019s still in the early stages, though. So as consumers refinance and take out new mortgages, banks stand to book even more profits. In other words, the housing market is finally switching from being a hindrance to a help in terms of banks\u2019 profitability.<\/p>\n

~Reason #4: Still on Sale<\/strong><\/b><\/p>\n

Even after the impressive run-up last year, Bank of America\u2019s stock represents a good bargain. The forward price-to-earnings (P\/E) ratio of 9.4 is 32.4% less than the forward P\/E ratio for the average stock in the S&P 500 Index. <\/strong><\/p>\n

As Stephen Weiss of Short Hills Capital notes, the stock is \u201cstill\u201d cheap on a price-to-book (P\/B) basis, too. Shares currently trade at about a 40% discount to the industry P\/B ratio.<\/p>\n

~Reason #5: Institutional Support <\/strong><\/b><\/p>\n

When it comes to investing, I typically advise against betting with the crowd. The one exception? When the crowd is heavy-hitting institutional investors. The size of their bets provides much-needed support to share prices.<\/p>\n

If you have any doubt, just ask Apple<\/strong> (AAPL<\/a>). New data from Reuters<\/em><\/a> suggests that the massive drop in Apple\u2019s share price in the fourth quarter was precipitated by big hedge funds selling out of their positions.<\/p>\n

In Bank of America\u2019s case, however, institutional investors are mostly doing the opposite. For instance, Europe\u2019s largest hedge fund, Lansdowne, purchased 26.5 million shares in the fourth quarter, according to regulatory filings. Both Adage Capital Management LP and Arrowstreet Capital LP purchased 14.7 million more shares. The list goes on.<\/p>\n

It\u2019s also important to note that these purchases came after<\/em> the stock rose 55% in the first three quarters of 2012. It stands to reason that hedge funds wouldn\u2019t be making such sizeable bets in recent months unless they expected much more upside ahead. Any additional purchases promise to provide an additional boost to share prices, too.<\/p>\n

~Reason #6: Dividends, Please <\/strong><\/b><\/p>\n

Retail investors\u2019 love affair with dividend-paying stocks continues to heat up. And if Bank of America increases its dividend this year, which is a strong possibility, it could lead to a massive influx of dividend investors.<\/p>\n

The trick, of course, is being positioned ahead of any such moves.<\/p>\n

Buying Shares isn\u2019t Enough<\/strong><\/b><\/p>\n

To be fair, risks remain for Bank of America\u2019s business. Like unknown settlement costs for past mortgage practices, continued deleveraging by consumers and historically low interest rates, which squeeze profit margins.<\/p>\n

No doubt, such factors prompted some institutional investors to take their profits and run. In the last quarter, hedge fund, Perry Corp., sold out of its entire 7.5 million-share position.<\/p>\n

Meanwhile, other investors, like Boston-based Geode Capital Management LLC, pared back their holdings by about 10%.<\/p>\n

On the whole, though, the investment case for Bank of America remains much more bullish than bearish.<\/p>\n

Whitney expects the stock to top $15 per share in the next six to nine months. I think that\u2019s a conservative estimate. But let\u2019s go with it anyway. Doing so implies that the stock carries about a 25% upside to current prices.<\/p>\n

I\u2019m sorry. But that\u2019s not enough profit potential to earn a \u201cmust own\u201d distinction from yours truly.<\/p>\n

Bottom line: Forget simply buying Bank of America\u2019s stock, as Whitney suggests. If you want to profit from this momentum trade, I recommend buying just \u201cout-of-the-money\u201d LEAPS options, instead.<\/p>\n

Doing so involves tying up about 90% less capital. So it limits our downside and frees up capital to invest in other compelling opportunities.<\/p>\n

At the same time, it also increases our profit potential by putting the power of leverage to work in our favor.<\/p>\n

Less risk and more potential profits? Who doesn\u2019t want that?<\/p>\n

Ahead of the tape,<\/p>\n

Louis Basenese<\/p>\n

Article By WallStreetDaily.com<\/span><\/a><\/p>\n

Is Bank of America (BAC) Truly \u201cA Must Own Stock\u201d for 2013?<\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com Holy smokes, Batman. Meredith Whitney is at it again! You\u2019ll recall, she\u2019s the banking analyst who infamously predicted in an interview with \u201c60 Minutes\u201d that \u201chundreds of billions\u201d of dollars in municipal bond losses would occur in 2011. She was way off the mark, though. Only about $3 billion in losses was actually … <\/p>\n

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