Deciphering the reaction to Bank of America
Posted
Apr 21 2008, 04:01 PM
by
Matt Koppenheffer
After watching relatively positive reactions to horrible earnings reports from the likes of Citigroup and Merrill Lynch last week, investors are far less chipper about the news out of Bank of America today. So it wouldn't be surprising if investors watching the financial sector are wondering when bad is good and when bad is just... well, bad.
The beginning and end of that story is expectations. Think about it this way: say you are expecting a meteor to crash into earth and create an ice age that will end life as we know it. The following week you wake up to hear that the meteor will end up missing earth, but you find that somebody has stolen your car. On balance you're still probably pretty psyched about the situation.
In that same way, Citigroup and Merrill have had some very pessimistic expectations thrust on them. In fact, it's been so bad for Citi that, as Charley Blaine pointed out last week, Apple is now worth more as a company than Citi. In a situation like that, investors are really pretty impressed with anything north of abject failure.
It's hard to be a financial company today without having a thick fog of pessimism following you around, but it's been less so for Bank of America. Investors have rightly expected that the bank would hold up better than its foe Citi, and many think that it'll end up being rewarded for snapping up beleaguered Countrywide at just about the nadir of pessimism there. Throw that reduced pessimism in a pot with results that missed analysts expectations, and you can serve a plate full of disappointment every time.
Of course, this doesn't mean that all investors are now suddenly backing away from BofA. The Motley Fool's CAPS community has rated the stock three stars out of a possible five, which isn't great, but puts it near the top of the heap when it comes to the financials. The stock is currently yielding nearly 7% and there are some investors that think the end of the credit crisis is around the corner. Pladad4life, one of CAPS top investors, is one of the BofA bulls. He came away from the bank's earnings fairly sanguine and said:
This stock is well poised for future gains and the industry will correct itself in the next 12 months ... All things are cyclical and the industry is approx. 12 months into the 18mo cycle. This is the time to buy these stocks while they are beaten down and paying a dividend of ~6.8%. Look for stock to grow per annum at 15% with a nice 20% bump in 2009.
Do have a different view of Bank of America? Head over to CAPS and share your opinion with the 95,000-plus investors that are already part of the community.
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Disclosure: The author owns shares of Bank of America. The Motley Fool has a disclosure policy.
