On Bloomberg TV yesterday morning, Betty Liu almost fell off her chair when I told her that after all these years, the investment fund I manage has at last taken a position in Bank of America (BAC).
Say, get up off the floor! Yes, BofA is still, for the most part, the same BofA I've been complaining about for years: a lumbering bureaucracy of walled-off fiefdoms that don't do much especially well, all overseen by a management team about which I have my doubts. Hugh McColl and Ken Lewis may be gone, but the deadening "culture" they fostered, of get-big-no-matter-what-and-then-it's-every-man-for-himself, still pervades the place. I wouldn't want to work there. No one is going to mistake BofA for Wells Fargo or JPMorgan Chase any time soon. So stipulated.
But — and this is a very big but — the stock is cheap. Really cheap. At current levels, Bank of America trades at all of 56% of its stated book value. At a price that low, one can invest in what is, after all, attractive franchise (although run by a mediocre management) and still earn attractive returns. By way of contrast, Wells trades at 125% of book, while Morgan trades at 100% of book.
It's no secret why BofA trades at such a big discount, either. Following the housing collapse, the company faces by far the most mortgage put-back claims of any of the big home lenders. (It can thank the Countrywide acquisition for that.) In particular, MBIA is suing BofA over reps and warranties it made regarding $21 billion in Countrywide MBS that it agreed to insure. Pimco is suing over $47 billion in MBS. [BofA settled with Fannie (FNMA.OB) and Freddie (FMCC.OB) at the end of last year.]
Those are big, scary numbers — the kind that drive investors away and keep them there. Until the claims are resolved and BofA's liability actually known, the stock isn't going anywhere.
Now, I have no specific knowledge as to what's going on at BofA, either in the boardroom, the legal department, or Brian Moynihan's head. But I'm willing to bet that the longer the stock lingers down here in the weeds, the greater will be the pressure (and the wish) to bring the put-back matter to a conclusion. The final settlement may not be optimal, but it will be a number that everyone can live with so they can all move on. And, I suspect — again, with no specific knowledge — that such a settlement could happen sooner rather than later. And when it does happen, BofA's stock figures to move up substantially in a very short period of time.
And if I'm wrong? Well, I still own the company at 56% of book.
And, as I say, BofA's franchise is attractive. The company is a strong deposit gatherer, while Merrill Lynch is well-positioned to benefit from the recovery in the capital markets business. The card business is getting better, as well.
No, this isn't the biggest position in our portfolio, but it's in there. At this price, I like the risk vs reward.
What do you think?