Eight Reasons Bank of America Is Going to $20

Feb.20.09 | About: Bank of (BAC)

We are experiencing an overreaction of historic proportions when it comes to the financial sector and specifically Bank of America (NYSE:BAC). In case you haven’t noticed, these extreme overreactions are becoming the norm; a thorough understanding of the reasons for the overreaction are paramount to generating great investment returns. The market has gotten Bank of America terribly wrong in the short run as the ‘cloud of uncertainty’ has collided with the ‘sea of negativity’. Governmental uncertainty combined with the market’s negativity are the contributing factors for Bank of America plunging below $4 a share. After riding Apple (NASDAQ:AAPL) calls to triple digit gains in 2007, and then riding oil puts to triple digit gains in 2008, I am making Bank of America my #1 holding for 2009. By next year this stock will be back to $20 a share. Consider the following:

1) The market is running wild on some hyped up article written in the Financial Times that claims Obama is considering nationalizing the banks. If you actually read the article you’ll notice the anti-American sentiment at the very beginning when they say that ‘nationalization has long been regarded in the U.S. as a folly of Europeans...’ Ok, I get it, Europe has been right all along. Whatever. Obama’s true feelings on nationalization came out in his ABC interview after Geither’s banking speech when he laughed out loud and said, “Sweden had like five banks. We’ve got thousands of banks...managing and overseeing anything of that scale...wouldn’t make sense. And we also have different traditions in this country."

2) Obama understands that the markets will determine his success. He has been very upfront in his stance that the success of this financial plan will depend on how the markets respond over the next few months. The idea of killing off current shareholders and taking Bank of America off the market during a nationalization phase is unthinkable.

3) Tim Geithner does not believe in nationalizing the banks either. Mr Geithner last week said: “Governments are terrible managers of bad assets.” He went on to outline a plan that will seek help from the private sector, will maintain a market for these toxic assets, and will increase transparency. Nationalization accomplishes none of these three.

4) Any talk of banks would be incomplete without the opinion of the woman who has been right all along, Meredith Whitney. Obviously she is not high on the banks but in her interview on CNBC Wednesday she was very careful not to include Bank of America in her criticisms. She told investors to sell Citigroup (NYSE:C) but would not mention Bank of America. She also is against nationalization and advocates the use of non punitive capital to strengthen the system. Maria Bartiromo wanted to get her to say 'sell all the big banks' but she never said it, in fact she mentioned that JP Morgan (NYSE:JPM) would be a survivor as they are well capitalized. I believe Bank of America is in a similar position.
5) Earlier this week, Bank of America actually paid back $402 million in a TARP dividend payment to the U.S. government. If this doesn’t show their commitment to repaying taxpayers I don’t know what would. CEO Ken Lewis has mentioned that his company will not need to borrow any more funds, that they are well capitalized and that his company had a good January. They were led by Countrywide who he described as being 'on fire' because of the boom in refinances.
6) The Fed will be purchasing $500 billion of mortgage backed securities over the next six months. Bank of America took one for the team by going through with their purchase of Merrill Lynch even when they had second thoughts, they did it at the request of the Fed and the Treasury who worried about a systematic risk if the deal were to fail. The Fed will be as friendly as possible to Bank of America in this repurchase program.
7) Bank of America will be the undisputed leader of the new economy. I’m excited about being invested in the largest retail brokerage (Merrill Lynch), the largest mortgage lender (Countrywide), and a bank who has been profitable for 17 years in a row, including 2008 (Bank of America).
8) Huge insider buying.
See you at $20.
Disclosure: Long 2011 $5 BAC Calls.