BAC (Bank of America): I'm crazy right? Well... wrong.

Gosh there are so many idiots on the boards who don't know what they are talking about. I love how they say that Bank of America buying Countrywide in a fire sale was the worst thing they can possibly do. First off, if country wide were really in that bad of a shape, would it really be a fire sale or would it be poison? Well, Bank of America had 6 months to review it all and frankly, they sure seem eager to close it. I'd trust them over these morons any day.

The boards are calling for the firing of the CEO Ken Lewis but let's consider a few things. On October 19, 2007 Ken Lewis didn't lay it on easy about BofA's performance.

"'Two-thirds was just mistakes we made in judgment,' Mr. Lewis told analysts on a conference call. 'Clearly, we bear a lot of the blame, much more so than just market conditions.' He also promised that things would change, indicating that layoff's are imminent in the investment banking arm of BofA."

These are clearly not the words of a man without high integrity and lack of responsibility. Warren Buffett loves managers who take responsibility because he feels that once you admit to a problem, the faster you get around to fixing it. He didn't blame market conditions like many others and let's not forget who was the person responsible for BofA NOT issuing any of the option-ARM loans that are responsible for the sub-prime mess. Ya, that's right. It's Ken. He resisted the institutional imperative that got all his other CEO colleagues fired.

Ken Lewis shrewdly negotiated the rescue of Countrywide to protect the bank's interests in taking on one of bank regulators' biggest headaches in years. Let's remember that BofA said it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after 
taking over the mortgage lender. Pretty much BAC has the option of firing CFC's debt into the sun (and has stated its willingness to do so). If that happens Countrywide's bondholders face the risk of default. Not the share holders. On top of all that, the CFC purchase now allows BofA to make tax write-offs over the next 20 years. They also got an incredible operation at fire sale prices (FYI, the operations unit alone is worth what they paid for it). Finally, I might add that if the Fed wasnt backing the countrywide deal maybe BofA wouldnt have done the deal. I think there are a lot of things people aren't aware of when it comes to this deal.

OK, finally for some numbers.

Bank of America is the second largest retail bank on the planet. The only one above them is Citigroup and they lost $5 billion in first quarter. The share price is currently at $14.67. In contrast, Bank of America made $1.21 billion in profit first quarter. Definitely not on pace from the last two years but in this environment, a profit is pretty darn nice.

BAC $18.70
P/E: 7.91
F P/E: 9.50 (indicates that they are expected to make less than last year, no big suprise)
Dividend: 0.64 (still super nice)
Yield: 13.65 (amazing yield, let's hope it holds)
52Wk Low: 18.44 (just hit it yesterday, did you buy?)
52Wk High: 52.96 (40-50 range has been the average price of BofA for the last 5 years - See Chart)
Mkt Cap: 83.49B
Inst. Own: 58% (It's ok, I think everyone is on the sidelines waiting to see what happens)

Also 1.715 T in assets and 1.568 T in liabilities so that leaves us at 59B (see source) after you the math and divide that by 4.45 B shares outstanding and that gives you a value of $13.26 a share. More than half of what it's priced at right now.

It'll take a year or so but at some point in the future, the financial segment will recover, and stocks like BAC will return to former prices. Banks recovered from the savings and loan crisis of the 1980's and 1990's with a lot of government help and a number of bank failures. This will be no different.

So what's low? Well, we are super close to BAC shares hitting their 2000 panic lows at $18.15. We hit $18.44 today.

The chance of BofA failing is near zero (If other banks fail, it will drive more customers to BofA). Its dividend is in the stratosphere. Ken has said there is no reason to cut it and frankly, he'll do so to signal the market that nothing is wrong. BofA going to weather this storm, turn the corner, and begin re-appreciating in price. I'm focused on the dividend, so I am not as concerned with how long that takes as I would be with a "growth" stock. In the meantime, I will happily collect my checks each quarter. When it returns to it's average operating price of 50, you would have made more than 150% off your investment. All while collecting a super nice dividend along the way.

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I would advise everyone to read the Q1 2008 earnings call if you are looking for insight and some calm into this stock.
http://www.123jump.com/earnings-calls/Bank-of-America-Corporation-First-Quarter-Earnings-Call/27433/41




Notes:
In Portfolio: Just opened a position, will accumulate as it goes down
Duration: 5 years
Best purchase of the weekend: $7 pool hammock from Walmart