BofA Has More Upside Potential Than Downside Risk

| About: Bank of (BAC)

Late in Tuesday’s market session I began to acquire shares of Bank of America (NYSE:BAC). At the time I saw the risk/reward trade-off of owning the stock as benefiting long speculators and investors. There is no doubt that pressure is being put on Bank of America by the hedge fund community through short selling (without the need of an uptick) coupled with put buying and credit default swaps. Rumors of large write-offs and the need to raise more capital sent the stock lower during a very bullish session.

I have waited very patiently for several weeks in the belief that once the stock broke below $10 it would sink even further. There were many smart investors buying stock at $10 and above. Once that buying dried up and the markets began their summer swoon, Bank of America stock cratered. Now opportunity was knocking with the stock selling at around $6.20 to $6.25 Tuesday. It was time to step up to the plate and commit some capital. I did so, at first, for my more aggressive clientele.

The once maligned purchase of Merrill Lynch may now be the crown jewel of Bank of America. The value of Merrill Lynch is well over where the stock now sells. In fact, it could be as much as $10 or more. The company, unlike in 2008, has an ample amount of liquidity and will not face Lehman Brothers-like short term funding and potential default problems. Sure there is still a mortgage overhang for BAC. Countrywide continues to fester like a herpes outbreak within the company. However, that is already priced into the stock which has fallen from its 52-week high of $15.31 to Tuesday’s close of $6.30.

Many estimates for Bank of America’s book value are being thrown around by Wall Street analysts. Most of them are looking at a valuation of at least $10. We can forget the old days of financial companies selling at 1.5 to 2.0 times book value. If I have to be a contrarian, so be it, I will take the other side of the shorts on this stock. It appears that there is excellent upside potential for Bank of America and the downside risk is limited to what is already a very low stock price.

Disclosure: At the time of this blog entry Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was long BAC stock --- although positions can change at any time.