Investing Wisely -- BAC - An Excellent Bellwether Company
A Brief Intro: My focus is Investing Wisely, e.g. taking advantage of the Bull / Bear Cycles as they occur within the overall marketplace. Integrating modern analytics within these Cycles, means maintaining a process of the thorough fundamental analysis of many Companies in my universe. I believe that this discipline provides the necessary clarity regarding the rotation that most all Companies goes through - from favorable times to unfavorable times and perhaps back again.
The current market capitalization of BAC is over 163+ billion, making it the 11th largest Company in the U. S. and Bank of America Corp. is now the 5th largest revenue producing U.S. Company with J. P. Morgan Chase (JPM) and Citigroup (C) being 2nd and 3rd.
The company has excellent management that caters to most anybody except those individuals and businesses that are in need. Definitely, it does not operate as and is not now a stable organization. It presently trades with similar characteristics to other "Go - Go" companies within the financial sector. This "financial" does not at this time qualify as a "Quality" firm and its shares should likely be avoided.
While the company did repay its 45 Billion TARP loan in December, it is still sitting on billions of dollars of vulnerable residential and commercial mortgage debt -- one reason the company spent 8,000 words discussing risk in its annual report.
It is maintaining a very poor record of surpassing analysts quarterly earnings estimates. That's Important! Therefore, one could conclude that it is highly likely that any future pullback will be, once again rather severe.
My analytics, to a degree, have to do with comparative analysis. Comparing BAC with other large Banks and other top capitalization / revenue producing companies in general, provides a clear fundamental short-fall for both the Banking Industry and Bank of America Corp.
Timely and negative news is that Bank of America is totally submerged in the foreclosure arena and serious concerns loom. These guys are super smart but very dumb at the same time! Dumb seems to be prevailing at this time.
As a Sector, the Financial / Banking, and its component companies have always been difficult for investors to profit from. This is likely due to the revenue-dynamics that evaluations are often tough to figure. Financial firms in a negative economy are perhaps best left for Traders and not Investors. Typically, at the bottom of an economic cycle, they can appear to have relatively high P/E ratios. However, when the economy improves and appears to be topping, the P/E multiple then tends to shrink. In BAC's case, they will have to get a string of earnings going before the P/E can begin 'shrinking'.
This perhaps explains why many companies trade for high multiples (perhaps 30 or 40 or more - times profits) during bad economic times, and end up trading for less than ten-times profits when earnings growth having fully taken advantage of the improved economy.
So, with regard to Bank of America we definitely can blame the economy, but the primary blame for the poor performance is in the company and its management over several or more previous years.
My analytic focus (to invest or not to invest) on any company is heavily weighted on fundamentals. B of A appears to have the prospect of improving earnings. However, for prudent investing those earnings will have to stabilize over several quarters before I would consider it be a Wise Investment. Relating BAC to its peers is also not presently a pretty picture.
The "Corporate Governance" for BAC is: Board (Low Risk), Audit (Low Risk), Compensation (Low Risk), Shareholder Rights (Low Risk). These ratings are surprising to me!
As for the Financial Statements, all look just (plain Jane) and ok, nothing appears positive or compelling. In summary, Bank of America Revenue, Operating Income, Net Income and Balance Sheet all increased / improved, but still have a long way to go. The most current earnings and revenue results appears to have benefited from their brokerage and trading practices (not a positive sign).
The price activity of Bank of America has continued to decline from the May lows. You may remember, in late March BAC broke down from about 18.5 to a low of 12.6. After a small bounce in this September rally it is back to its lows. You might also remember that back in February 2009 it was trading at about 3.1. That's quite an important consideration!
Bank of America Valuations and Price Target: My Valuations uses BAC's current multiple (P/E):
|Approx. Current Price||Current Multiple (P/E)||PEG|
|Fiscal Year||Est. Low / High - Price
Target Range (U. S. Dollars)
Price (U. S. Dollars)
|Percent Change from
|2011||No Earnings = No Calcs!)|
|2012||(No Earnings = No Calcs!)|
|This Yr. / Next Yr.||Average Estimate||High Estimate||Low Estimate|
Most Financial Analysts determine the Price Target Range by estimating future earnings per share and then applying a price-to-earnings "multiple", also known as the P/E ratio. I calculate Price Targets for both the current and next fiscal year by applying the stock's present multiple to the average professional analyst's estimate.
For a current (Up to the Minute) Chart of B of A:
Click and Scroll Down - http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID4095527
To view my current Forecast (right here in SA) on B of A:
Economically speaking there is always a concern or question as to what the U. S. Federal Reserve Board may or may not do regarding the management of the economy. We do know that an election is coming soon, and history confirms that little is done proactively ahead of an election. We also know that Rallies have come when the Fed injects capital or a fiscal stimulus into the economic system, but that is becoming an "old news" factor. How this plays out over the post election period with the Banking Industry remains elusive and perhaps daunting.
We also know that BAC is a big player in today's economic picture is important to take that into account before investing. In the past month the Banking Industry has not offered the necessary support to help promote a recovering economy. I believe this trend will continue and many more Banks will continue to go under. Unlike other banks, B of A has the governments support, but even politicians can get fed up with a one-sided relationship.
My Wrap: So while the General Market may be in for a pullback, the prevailing question from most investors is: How big will it be? Do I hold my current positions or do I sell? Etc. The answer will be obviously quite clear when it (the pullback) is over but an old axiom tells us to be prudent in times like this. You might want to remember that, Cash is always an excellent safe harbor. However, if you are a proactive investor, taking bearish positions may be also being wise.
I believe a correction is coming, and when it does it will likely significant effect B of A and many other securities in the financial sector. So, the second question is always - When? The answer to that question is one that we can be sure of: that is, there will be future rallies and pullbacks as the marketplace cycles. You can easily confirm this by simple looking at historic long-term charts of the stock market itself or just about any company or ETF. The point is, and we all know, that they (Indices and Securities) all go through "cycles" in one manner or another. Typically, when over-extended prices occur, they turn down. The opposite is also normally true - when over-contracted prices occur, they turn up. The trick is to have a methodology in place that both take advantage of these facts and also offers a consistent and a high probability of profitable - future investment decisions. That's why I have always started my analytics with detailed fundamental analytics of high profile companies like B of A. I believe that, BAC and its present fundamentals is an excellent leading indicator for the Financial Sector. In this case 'leading' may not be the correct word.
It is important that this Article be viewed not as a recommendation for the purchase or short sale of Bank of America Corp. Favorable to the process of Investing Wisely, it is intended to suggest that it's Sector has both positive and negative companies and ETFs to consider when making investment decisions. BAC for me, is just an excellent "bell-whether" company to help identify candidates for Buying and candidates for short selling as the marketplace cycles from Bull to Bear and back again over time.
Source & Data Information: BarCharts, Bauer Capital Management, Bloomberg, CNN Money, Fortune, MSN Financial, RiskMetrics Group, Seeking Alpha, StockCharts, Reuters, Yahoo Financial, Worden.
Smile, have fun - Investing Wisely.