It's been a little while since I've checked in on the Bank of America situation. Somewhere over the last couple of months, Bank of America (NYSE:BAC) lost the steam that it had behind it chugging along into 2014. It all started when the bank was forced to re-write its capital allocation plan for the Fed, and then it was compounded when people started throwing around big numbers in conjunction with the bank's coming DOJ settlement resulting from the '07-'08 subprime crisis. It's been going on eight years, and the bank is still trying to put the residential mortgage-backed security issues behind it.
Reuters reported earlier this month that negotiations between the bank and the DOJ have stalled, with the last offer coming from the bank at an astounding $12 billion to settle:
Bank of America Corp and the U.S. Department of Justice (DOJ) have reached an impasse in negotiating a multibillion-dollar settlement deal related to the bank's mortgage investments, the New York Times reported, citing people briefed on the matter.
The talks stalled on Monday after the bank's latest offer of more than $12 billion to resolve state and federal investigations into its sale of mortgage investments fell far short of prosecutors' demands, the newspaper said.
On Tuesday, as Bank of America sought to continue negotiations, the Justice Department moved to put the finishing touches on a civil complaint against the bank, the report said, citing the people. (r.reuters.com/nuk99v)
The lawsuit, which is not imminent, is expected to accuse the bank of selling mortgage investments that led to billions of dollars in losses.
As I said above, justice is justice, but this is getting a little long-winded. At some point, even the most anti-bank people are going to start to turn to the DOJ and ask why they're dragging this on longer than it needs to be dragged on. While not taking away from the veracity of the charges against BAC and not forgetting what a mess '07-'08 was, at some point we have to move on.
It has certainly had its effect on the bank's stock of late. In the face of this noise, the bank has fallen from highs near $18 in late March, to current levels around the mid $15 region. Skittish investors have taken profits from a multi-year ride up, and new money looks to be apprehensive to pour into a long position with the bank. Despite being down 9.5% over the last three months, the bank has still provided investors with 12-month returns of 20.9%, based on yesterday's closing price.
The chart looks unappealing from the technical side - the moving averages are moving in the wrong way from each other, the bank hasn't been able to top major resistance at $16.25, and the bank looks to be in a mid- to long-term downtrend. However, for the mid-to long-term run, QTR thinks the technicals will eventually give way to a rosier picture for the bank.
As we know, the bank is still trimming its staff around the edges, making the company as lean and mean as possible - as Brian Moynihan's cost cutting program wraps up this year. Seeking Alpha reported on the bank laying off 540 employees from its LAS unit in Charlotte:
- It's Charlotte's biggest single bank layoff since the financial crisis as Bank of America lets go 540 from its Legacy Asset Servicing unit in the city - roughly two-thirds of the local workforce in that division.
- At its peak in 2012, LAS employed 42K across the country, but the bank has trimmed one-third of those jobs since, alongside cuts in the number of troubled loans which need servicing.
This is apparently the type of news that analysts like to see, however. Analyst sentiment behind the bank continues to be strong as it was heading into 2014, with many analysts asserting that the worst is over with and that the bank is reaching the light at the end of the tunnel. The bank got a little help this morning, with an upgrade over at Deutsche Bank, who raised their outlook on the bank to BUY, with a price target of $18.
Bill Smead from Smead Capital Management weighed in weeks ago on CNBC and seems to share the same sentiments as I do with regards to the '07-'08 issues being a bit drawn out at these stages of the game:
- The Too Big To Fail banks are the new Philip Morris - "The most sued, regulated, politicized, and damned company in the last 50 years," value investor Bill Smead tells CNBC. Philip Morris (now Altria) also happens to be the best-performing stock on the NYSE during that time frame, he adds.
- "Their sins are all six to eight years old," says Smead of Bank of America ( +0.2%), his fund's 4th largest holding. "The good things are all out in their future. Basically, as a value investor that's all you are looking for in this world."
- Smead sees normalized earnings hitting $2.50 per share over the next four to five years, and a $30 stock price.
In addition, the ultimate analyst Warren Buffett remains confident in his investment in the bank. Gurufocus pointed out in a recent article:
Buffett told in a recent letter that "it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly". There is no doubt that the guru was confident about Bofa´s management, the success of its businesses model and of course, he was optimistic about its future. The crucial question is: Should you be too?
Yes, we're still waiting to hear about what the finalized "Fed approved" details of the bank's capital allocation are going to be. But, as I stated when they had to redo it, this is only a short-term issue and will be cleared up sometime in the relatively near future. Further, this only means that investors may get slightly less than expected in returns from the bank, which QTR believes will be negligible because he expects the underlying equity to rise possibly as much as 25% before the end of 2014.
While the bank appears to be struggling, those with the correct perspective see the bank on the very back end of resolving the two major issues that are going to allow it to operate without any grey cloud over its head. Mr. Moynihan has done an outstanding job as CEO. He was tasked specifically with cleaning the '07-'08 mess up, he's done very well so far, and QTR is expecting him to finish the job and finish it the right way.
I believe Bank of America is an attractive long-term purchase at these levels, and I remain bullish on the bank. My money can ride with Buffett's any day of the week.
Best of luck to all investors.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.