April 21, 2012 Comments

Comment on Bank of America.

Bank of America released earnings last week. This is a complex company. After reading its earnings press release and looking at the financials in the supplemental release and looking at its Q1 presentation, I conclude the company is really too complex for the type of analysis that I do. It’s earnings have not yet recovered from the credit crisis and are subject a number of large unusual gains and losses.

I own it and I am interested in it because the shares are selling well below book value. If, as expected, it continues to recover then the share price should rise substantially. I normally don’t look at analyst forecast earnings as they tend to be optimistic. In this case the actual recent earnings are not reflective of what it will likely be earning in the next year or two. It trades at 8 times projected 2013 earnings which is an attractive price if those 2013 earnings do in fact materialize. It trades at 42% of book value and 65% of tangible book value (which deducts goodwill).

It definitely has risks including the outcome of litigation related to mortgage activities. If the U.S. housing market and economy continues to slowly improve this stock should do well although it is also subject to company-specific risks that could cause it to lag even if the economy and other banks do well.

I consider it to be definitely speculative I also consider it to have a good probability of being a very good investment over the next year or two.

I am considering adding to my holdings even though it already accounts for 5.1% of my portfolio (I have a very concentrated portfolio).

If things go well and this stock recover significantly then my longer term plan would be to sell and to not keep this company on our list in the long term.