Bank Of America: Calling The Bottom

| About: Bank of (BAC)


Bank of America has sold off violently in the past few weeks.

News yesterday was a huge positive.

Have the lows for 2014 been made?

Well, my friends, it seems the world may be coming to an end as we know it. No, aliens aren't attacking and no, there isn't a giant rock hurtling towards Earth, but something even more momentous has just occurred; esteemed SA contributor Regarded Solutions said Bank of America (NYSE:BAC) could be moving higher. In his most intriguing article to date, RS explains that his steadfast pessimism on BAC shares of the past year or so may well have seen its end. It's a terrific read and I won't attempt to steal its thunder here but if you haven't read it, please do so. I have a tremendous amount of respect for RS and while we have disagreed on BAC in the past, I always read his work and I'd recommend you do the same. RS has offered up a steady stream of "dead money" BAC articles in the past so imagine my surprise when I read his article today wherein he essentially conceded that a bearish stance on BAC was no longer the correct one, in his view.

The newfound stance on BAC comes in the wake of a nasty selloff due to a confluence of factors, not the least of which was BAC's uh-oh in its capital calculations for the stress test this past spring. The calculation blunder has been well covered here and in other places so I won't rehash the details but its impact has been undeniable on shares as investors simply sold first and asked questions later.

Fast forward to today and BAC has resubmitted its capital plan to the Fed for its review with a "smaller" capital return plan than before. We won't know what BAC submitted until it is approved or denied but the fact that BAC is confident enough to request a capital return plan after having withdrawn it the first time 'round is a great sign.

What's even more exciting is the news that BAC's calculation error had a de minimis effect on its capital ratios. This confirms what many of us have been saying since the news broke; the selloff from this error was insane given the severity (or lack thereof) of the error itself. That was confirmed yesterday as BAC shares shot higher on high volume, posting a 3.4% gain.

Yesterday's convergence of events has signaled to me that BAC has touched its bottom for 2014 and will spend the rest of the year accruing gains from today's levels. Of course, I'm not suggesting BAC won't trade down but I don't think we'll revisit the lows we've seen in the past few weeks and that we'll finish 2014 materially higher than current prices.

BAC is still cheap on many metrics including book value and earnings and it still has all the same people and earnings power it did before the selloff. None of this changed when the calculation error came to light and as many of us said, nothing in the business had changed. It seems the rest of the world may have caught up yesterday and realized that BAC isn't burning to the ground and that it still has tremendous earnings power in front of it.

I suspect that when the capital plan is approved that we'll see either modest buybacks or a higher dividend, but probably not both. However, it really doesn't matter how the capital is allocated so long as it is. I really don't care about being right about how BAC will split it up, I just want to see that it gets done. One of the knocks against BAC shares is that they pay virtually no dividend and with the reneging of the previously submitted capital plan, the bears feasted on BAC's pain. But those days are over and I am betting that we won't see the 2014 lows again.

Disclosure: I am long BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.