With bank of America's (NYSE:BAC) stock sitting at $6.31 as of market close on Friday, September 23, it's getting into that range where the short-sellers can really take hold of this stock and completely wipe it out. It reminds me so much of Citigroup's (NYSE:C) stock in late 2008 during the beginning of the financial crisis.
Bank of America represents one of the best high risk/high reward stocks on the market. It is either going to go up a lot, or it will probably fail and be put into receivership, just like the Washington Mutual-to-JPMorgan (NYSE:JPM) takeover.
This is a hard stock to short, in my opinion, based on a number of fronts that I would like to get into. I've never been a very big supporter of anyone shorting stocks that sit under $10.00 a share, as the risks do outweigh the rewards. If you have the stomach for that type of investing, by all means go ahead. At first glance, Bank of America looks like the ultimate value stock. There is a high probability that in a couple of years BAC could be sitting at well over $13/share, if not much more. Yet, this is based on the opinion in large part that Bank of America is in that class of "too big to fail" banks. Again, the Citigroup connection in 2008.
When bank of America bought Countrywide, it was smart enough to keep the two independent of each other for legal purposes they probably saw coming. It seems more and more likely that BAC will now put its Countrywide problems into bankruptcy. There is mixed feelings on what this will do to Bank of America's stock. However, one must wonder if this move is already priced into Bank of America's current share price. If it isn't, this could provide a huge boost to the stock.
The possible downside to owning shares of Bank of America is substantial. As I mentioned earlier, many feel that Bank of America is indeed too big to fail, and that the government would not let that happen. Personally, I disagree. With elections coming up in the near future, the last thing politicians want to do at this point is to be the one who supported another round of bank bailouts. This includes president Obama. While there is debate as to whether the last bailouts did anything positive other than to help the banks themselves, the stigma of supporting more bailout money to banks who were careless with their lending practices is not something to simply brush off.
There is a prevailing attitude that these banks put the U.S. economy in the shape it's currently in, and enough is enough already. If they fail, so be it. The recent Moody's credit downgrade of Bank of America was based on the assumption that the government will not help out like it did the last time. The banks are on their own now.
Another troubling aspect of Bank of America recently is its selling off of higher-performing assets. CEO Brian Moynihan keeps reminding everyone that Bank of America is financially sound. Why does it keep selling off their profitable business assets then? They need cash, and they need it fast -- that's my only conclusion. The argument can be made that they are simply shedding businesses that are moving away from what they want to do as a bank in the future. I could understand this argument if it wasn't for the fact that they are selling these well below value. Why the rush?
There are currently lawsuits against Bank of America for its role in the housing collapse and mortgage-backed securities that took place. There will be many more to come. This is a huge aspect to take into consideration, as monetary damages are indeterminable at this point. Most likely there will be a settlement of sorts, but what stops future ones from possible litigation and/or settlement? Nobody can answer that at this point.
You either believe Bank of America will survive this, or you don't. Just be sure you understand the major issues Bank of America is facing, both in the short and long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.